<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------- ---------
Commission File Number: 0-29020
VIEWCAST.COM, INC.
-----------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in its Charter)
DELAWARE 75-2528700
------------------------------- ------------------------------
(State or other Jurisdiction of (I.R.S. Employer Incorporation
Incorporation or Organization) Identification No.)
2665 VILLA CREEK DRIVE, SUITE 200, DALLAS, TX 75234
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(Address of principal executive offices)
972/488-7200
---------------------------
(Issuer's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of November 9, 2000, 16,527,206 shares of the Registrant's common stock were
outstanding.
<PAGE> 2
VIEWCAST.COM, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1999 and
September 30, 2000 (Unaudited)..............................................3
Consolidated Statements of Operations for the Three and Nine Months
ended September 30, 1999 and 2000 (Unaudited)...............................4
Consolidated Statement of Stockholders' Equity for the
Nine Months ended September 30, 2000 (Unaudited)............................5
Consolidated Statements of Cash Flows for the Nine Months
ended September 30, 1999 and 2000 (Unaudited)...............................6
Notes to Consolidated Financial Statements...................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................16
Item 2. Changes in Securities................................................16
Item 3. Defaults Upon Senior Securities......................................16
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 5. Other Information....................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................17
SIGNATURES.....................................................................18
</TABLE>
2
<PAGE> 3
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,315,980 $ 5,642,941
Available-for-sale securities 3,410,853 2,558,760
Accounts receivable, less allowance for doubtful accounts
of $117,000 and $256,000 at December 31, 1999 and
September 30, 2000 (unaudited), respectively 1,386,395 2,386,154
Inventory 2,526,096 2,577,371
Prepaid expenses 93,598 179,430
------------ ------------
Total current assets 11,732,922 13,344,656
Property and equipment, net 1,338,143 1,384,284
Software development costs, net 429,502 365,627
Deferred charges -- 380,282
Deposits 64,815 70,593
------------ ------------
Total assets $ 13,565,382 $ 15,545,442
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 662,247 $ 1,040,725
Accrued compensation 418,360 519,808
Deferred revenue 270,779 382,033
Other accrued liabilities 392,713 1,357,991
Shareholder line of credit 2,408,827 2,408,827
Short-term debt, other 4,842 2,000
------------ ------------
Total current liabilities 4,157,768 5,711,384
Long-term debt -- 1,450,000
Commitments
Stockholders' equity:
Convertible preferred stock, $.0001 par value:
Authorized shares - 5,000,000
Series B - issued and outstanding shares - 945,000 at
December 31, 1999 and September 30, 2000 (unaudited), respectively 95 95
Common stock, $.0001 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 14,624,898 and 16,677,592 at
December 31, 1999 and September 30, 2000 (unaudited), respectively 1,463 1,668
Additional paid-in capital 44,889,810 51,889,284
Unrealized gain on securities reported at fair value and accumulated
other comprehensive income 1,410,853 558,760
Accumulated deficit (36,882,701) (44,053,843)
Treasury stock, 261,497 shares at December 31, 1999 and
September 30, 2000 (unaudited) (11,906) (11,906)
------------ ------------
Total stockholders' equity 9,407,614 8,384,058
------------ ------------
Total liabilities and stockholders' equity $ 13,565,382 $ 15,545,442
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $ 1,046,292 $ 3,492,744 $ 5,280,282 $ 7,789,540
Cost of goods sold 678,475 1,643,790 2,884,724 3,656,992
------------ ------------ ------------ ------------
GROSS PROFIT 367,817 1,848,954 2,395,558 4,132,548
Operating expenses:
Selling, general and administrative 1,918,214 2,548,305 5,336,405 7,026,113
Research and development 738,569 1,049,256 2,397,241 2,995,978
Depreciation and amortization 153,881 200,799 458,462 525,242
------------ ------------ ------------ ------------
Total operating expenses 2,810,664 3,798,360 8,192,108 10,547,333
------------ ------------ ------------ ------------
OPERATING LOSS (2,442,847) (1,949,406) (5,796,550) (6,414,785)
Other income (expense):
Dividend and interest income 78,068 100,222 184,708 282,157
Interest expense (271,068) (235,489) (850,765) (472,547)
Other 27 -- 40 --
------------ ------------ ------------ ------------
Total other income (expense) (192,973) (135,267) (666,017) (190,390)
------------ ------------ ------------ ------------
NET LOSS $ (2,635,820) $ (2,084,673) $ (6,462,567) $ (6,605,175)
============ ============ ============ ============
NET LOSS PER SHARE - BASIC AND DILUTED $ (0.21) $ (0.14) $ (0.55) $ (0.47)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 13,817,456 15,847,712 12,774,842 15,414,432
============ ============ ============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 945,000 $ 95 14,624,898 $ 1,463 $ 44,889,810
Exercise of options and warrants -- -- 1,232,077 123 4,108,642
Value of options and warrants
issued for consulting services -- -- -- -- 230,130
Conversion of long-term debt to
common stock, net -- -- 666,666 67 2,213,143
Sale of common stock, employee
stock purchase plan -- -- 24,354 2 74,066
Common stock issued for legal
services -- -- 2,500 -- 15,000
Other -- -- -- -- (19,585)
Convertible preferred stock
dividends - Series B -- -- 127,097 13 378,078
Unrealized gain on securities reported
at fair value -- -- -- -- --
Net loss -- -- -- -- --
Comprehensive loss
---------- ------------ ---------- ------------ ------------
BALANCE, SEPTEMBER 30, 2000 945,000 $ 95 16,677,592 $ 1,668 $ 51,889,284
========== ============ ========== ============ ============
<CAPTION>
OTHER TOTAL
COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
INCOME DEFICIT STOCK EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 $ 1,410,853 $(36,882,701) $ (11,906) $ 9,407,614
Exercise of options and warrants -- -- -- 4,108,765
Value of options and warrants
issued for consulting services -- -- -- 230,130
Conversion of long-term debt to
common stock, net -- -- -- 2,213,210
Sale of common stock, employee
stock purchase plan -- -- -- 74,068
Common stock issued for legal
services -- -- -- 15,000
Other -- -- -- (19,585)
Convertible preferred stock
dividends - Series B -- (565,967) -- (187,876)
Unrealized gain on securities reported
at fair value (852,093) -- -- (852,093)
Net loss -- (6,605,175) -- (6,605,175)
------------
Comprehensive loss (7,457,268)
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2000 $ 558,760 $(44,053,843) $ (11,906) $ 8,384,058
============ ============ ============ ============
</TABLE>
See accompanying notes.
5
<PAGE> 6
VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 2000
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,462,567) $ (6,605,175)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation of fixed assets 367,774 419,551
Amortization of software development costs 90,688 105,691
Non-cash charges to interest expense 561,977 111,431
Non-cash consulting fees exchanged for options and warrants 53,932 22,760
Changes in operating assets and liabilities:
Accounts receivable 885,933 (999,759)
Inventory 386,366 (51,275)
Prepaid expenses 5,195 (85,832)
Deposits 11,021 (5,778)
Accounts payable (1,902,736) 393,478
Accrued compensation (864) 101,448
Accrued restructuring charges (275,000) --
Deferred revenue 21,740 111,254
Other accrued liabilities (84,664) 777,402
------------ ------------
Net cash used in operating activities (6,341,205) (5,704,804)
------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment (254,354) (465,692)
Software development costs (77,185) (41,816)
------------ ------------
Net cash used in investing activities (331,539) (507,508)
------------ ------------
FINANCING ACTIVITIES:
Net proceeds from convertible preferred stock subscription - Series B 8,834,344 --
Net proceeds for the issuance of long-term debt -- 3,378,867
Net proceeds from the exercise of options and warrants 4,885,352 4,108,765
Proceeds from sale of common stock 43,089 74,068
Repayment of shareholder line of credit (1,261,945) --
Repayment of short-term debt-officer (96,285) --
Other (63,761) (22,427)
------------ ------------
Net cash provided by financing activities 12,340,794 7,539,273
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,668,050 1,326,961
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 439,791 4,315,980
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,107,841 $ 5,642,941
============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 7
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include the accounts of ViewCast.com, Inc. and its wholly-owned subsidiaries,
Viewpoint Systems, Inc., VideoWare, Inc. and Osprey Technologies, Inc.
(collectively, the Company). All material inter-company accounts and
transactions have been eliminated in consolidation.
The financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 1999, as amended, filed with the
Securities and Exchange Commission.
2. INVENTORIES
Inventory is comprised primarily of purchased electronic components and
computer system products, along with related documentation manuals and packaging
materials and consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Purchased materials $ 766,553 $ 769,283
Finished goods 1,759,543 1,808,088
---------- ----------
$2,526,096 $2,577,371
========== ==========
</TABLE>
Inventory at December 31, 1999 and September 30, 2000 is presented net of
reserves of $346,153 and $372,930, respectively. Reserves are provided for lower
of cost or market adjustments, obsolescence and for slow moving and damaged
inventory.
3. LONG-TERM DEBT
On April 28, 2000, the Company sold $4,450,000 aggregate principal amount
of 7% Senior Convertible Debentures Due 2004 (the "Debentures") pursuant to a
placing agreement dated March 28, 2000, and amended on April 28, 2000, by and
among the Company and RP&C International Inc. and RP&C International Limited
(the "Lead Managers") at an initial offering price of 100% of the principal
amount thereof, less 8% gross commission. In addition, the Company issued the
Lead Managers a warrant (the "Warrant") on April 28, 2000, in the name of RP&C
International (Guernsey) Limited, pursuant to Regulation S, to purchase an
aggregate of 89,000 shares of Common Stock, at an exercise price of $5.00 per
share, subject to adjustment in the event of adjustment of the Conversion Price
of the Debentures. The Warrant has a term of five (5) years and may be exercised
as to all or any lesser number of shares of Common Stock covered thereby,
commencing twelve (12) months after the date of issuance.
7
<PAGE> 8
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Unless previously redeemed, the Debentures are convertible into shares of
Common Stock of the Company at the option of the holder at any time at a fixed
conversion price of $5.00 per share of Common Stock, subject to adjustment in
certain circumstances (the "Conversion Price"). Upon voluntary conversion of any
Debenture by its holder, no payment will be made for interest accrued during the
period (i) from the most recent interest payment date preceding the applicable
conversion date, or (ii) from the date of issuance of the Debentures if the
Debenture is converted before the first interest payment (absent default by the
Company, in which event interest shall continue to accrue at a specified default
rate). Debentures which are converted prior to the first interest payment date
of November 1, 2000 will be converted at a ten percent (10%) discount from the
then effective Conversion Price, and Debentures which are converted prior to the
second interest payment date of May 1, 2001 will be converted at a five percent
(5%) discount from the then effective Conversion Price.
Effective September 14, 2000, holders of $3.0 million principal amount of
the Debentures exchanged their notes for 666,666 shares of common stock of the
Company at a conversion price of $4.50 per share. As an incentive for early
conversion, the Company paid debenture holders $106,740, which amount, has been
classified to interest expense.
4. SHAREHOLDERS' EQUITY - COMMON STOCK
In January through September 2000, the Company received gross proceeds of
$3,758,188 from the exercise of 1,097,245 private and public warrants to
purchase 1,116,556 common shares of the Company at exercise prices ranging from
$3.00 to $4.50 per share. Additionally, in August 2000, the Company received
$2,450 for the partial exercise of 17,500 underwriter warrants to purchase
17,500 public warrants of the Company at an exercise price of $0.14 per public
warrant.
In January through September 2000, the Company received gross proceeds of
$348,127 from the exercise of 115,521 employee stock options to purchase 115,521
common shares of the Company at exercise prices ranging from $2.06 to $4.63 per
share.
5. NET LOSS PER SHARE
Basic earnings per share is calculated by dividing net income/loss
applicable to common shareholders by the weighted average number of common
shares outstanding for the period. Since the Company has reported net losses for
the periods presented, the computation of diluted loss per share excludes the
effects of outstanding options, warrants, convertible debt and convertible
preferred stock since their effect is anti-dilutive.
Loss per share calculations for the three and nine months ended September
30, 1999 and 2000 are as follows:
8
<PAGE> 9
VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (2,635,820) $ (2,084,673) $ (6,462,567) $ (6,605,175)
Preferred dividends and accretion of
issue costs (202,779) (190,033) (587,827) (565,967)
------------ ------------ ------------ ------------
Net loss applicable to common shareholders $ (2,838,599) $ (2,274,706) $ (7,050,394) $ (7,171,142)
============ ============ ============ ============
Weighted average number of common shares
outstanding 13,817,456 15,847,712 12,774,842 15,414,432
============ ============ ============ ============
Loss per share as reported in the financial
statements - basic and diluted $ (0.21) $ (0.14) $ (0.55) $ (0.47)
============ ============ ============ ============
</TABLE>
6. COMPREHENSIVE INCOME
During 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, Reporting Comprehensive Income. The calculation of
comprehensive income for the nine months ended September 30, 2000 includes net
loss as reported in the Consolidated Statements of Operations and unrealized
gains and losses on available-for-sale securities. At September 30, 2000, the
Company had gross unrealized gains on available-for-sale securities of $558,760.
In addition, during the nine months ended September 30, 2000, unrealized gains
on available-for-sale securities decreased $852,093.
Available-for-sale securities is comprised exclusively of shares of
TekInsight.com, Inc. (TEKS) acquired through a strategic business alliance in
September of 1998. The quoted market price of TEKS shares at December 31, 1999,
September 30, 2000 and October 31, 2000 was $2.75, $2.06 and $1.56,
respectively.
7. SUBSEQUENT EVENTS AND RELATED PARTY TRANSACTIONS
Effective October 11, 2000, holders of $500,000 principal amount of the 7%
Senior Convertible Debentures exchanged their notes for 111,111 shares of common
stock of the Company at a conversion price of $4.50 per share. As an incentive
for early conversion, the Company paid debenture holders $17,790.
On October 17, 2000, the Company renewed its working capital line of credit
facility for up to $9 million with an entity controlled by one of its principal
shareholders and Chairman of the Board of Directors, H.T. Ardinger, Jr. The
credit facility bears interest at 12% per annum and is secured by all assets of
the Company. The availability of funds under the facility is subject to certain
borrowing base limitations based principally on qualifying accounts receivable
and inventory. The line of credit was extended for one year through and until
October 22, 2001 and includes a provision for automatic renewal through October
22, 2002.
9
<PAGE> 10
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The accompanying consolidated financial statements include the accounts of
ViewCast.com, Inc. (VCST), and its wholly-owned subsidiaries, Viewpoint Systems,
Inc. (Viewpoint), VideoWare, Inc. (VideoWare) and Osprey Technologies, Inc.
(Osprey) (collectively, the Company). The Company operates in one business
segment and is engaged in designing, developing and marketing advanced,
standards-based video products that enable video communication over the Internet
and corporate networks. The Company's Viewpoint VBX(TM) video distribution
system, Osprey(R) line of video capture cards and video
compression-decompression cards ("codecs") and ViewCast(R) line of Internet
encoding and streaming video servers deliver business applications for video
conferencing, video broadcasting, video-based training, distance learning,
telemedicine, surveillance and Internet and intranet video communications. The
Company markets its products directly to end-users, through original equipment
manufacturers, value-added resellers and computer system integrators, worldwide.
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, but not limited to, statements containing the words "will" and
"expects" and similar words, which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, product demand and market acceptance risks, the
impact of competitive products and pricing, product development,
commercialization and technological difficulties, capacity and supply
constraints or difficulties, general business and economic conditions, the
effect of the Company's accounting policies and other risks detailed in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1999, as
amended, the Registration Statements on Form S-3 filed on April 26, 2000 and
June 30, 2000 and other filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999.
Net Sales. Net sales for the quarter ended September 30, 2000 increased
233.8% to $3,492,744 from $1,046,292 reported during the same period last year
establishing a new quarterly sales record for the Company. The increase is
attributed to substantial growth in sales of the Company's Osprey(R) subsystem
products and its video distribution system products.
o Osprey(R) Subsystem Products. During the 3rd quarter of 2000, sales of
Osprey codecs and video capture cards increased 254.8% over 1999
levels and represented 70.1% of quarterly revenues compared to 65.9%
of total revenues in the 3rd quarter of 1999. The increase can be
attributed to growth in demand for the Company's subsystems from
channel partners in the Pacific Rim and Western Europe and to
shipments of its new Osprey-500 line of video capture cards designed
specifically for the capture of broadcast-quality digital video for
streaming media. The Oprey-500DVPro was developed by ViewCast and was
optimized exclusively to support the Microsoft(R) Windows Media(TM)
Format with cooperation from Microsoft's Digital Media division. The
Company expects to see increased subsystem sales for the remainder of
2000, much of the increase due to the introduction of the Osprey-500
products which have increased average selling prices over established
subsystem products.
10
<PAGE> 11
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
o ViewCast(R) Streaming and Encoding Systems. During the quarter ended
September 30, 2000, sales of ViewCast streaming and encoding systems
increased $335,141, or 162.4%, to $541,487 compared to $206,346
during the quarter ended September 30, 1999. To encourage new sales
and enhance functionality of its ViewCast streaming video systems, the
Company has incorporated the Osprey-500 and Osprey-200 series of
products and additional custom and third party software into
platforms designed for use by broadcasters and other professional
rich-media suppliers.
o ViewPoint VBX(TM) Video Distribution Systems. Sales of VBX video
distribution systems for the third quarter of 2000 increased by
$264,989 or 176.5% compared to the same period in 1999 and represented
11.9% of current quarter revenues. The increase can be attributed to
growth in VBX sales in Europe and North America. During June and
September of 2000, the Company sold VBX equipment to a leading Wall
Street investment management company in the U.S. The Company expects
sales of its VBX systems to increase as new product features are added
and new vertical markets are identified and developed.
Cost of Goods Sold and Gross Margins. Cost of goods sold increased $965,315
to $1,643,790 for the quarter ended September 30, 2000 compared to the same
period in 1999 primarily due to increased sales from all product lines as
described above. Gross profit margin for the quarter ended September 30, 2000
was 52.9%, representing an increase from the 35.2% margin reflected in the same
period in 1999 due primarily to increased sales of the Company's Osprey-500 line
of subsystem products and to manufacturing efficiencies. The Company anticipates
that, over extended periods, its margins will remain in the range of 46% - 53%.
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased from $1,918,214 during the 3rd quarter of 1999
to $2,548,305 in the 3rd quarter of 2000 primarily due to an increase in sales
employees and related overhead expenses. During the 3rd quarter of 2000, sales
and sales operating expenses increased 87.3% over 1999 levels. Since December
1999, the Company has added eleven sales employees consisting of regional sales
managers, vertical market specialists and sales engineers to bolster sales of
its ViewCast streaming/encoding servers, VBX video distribution systems and
Osprey subsystem products. In addition, sales expenses were much reduced during
the first three-quarters of 1999 due to workforce reductions and restructuring
efforts instituted in the fourth quarter of 1998. Additionally, during the
current quarter marketing expenses increased 17.5% over 1999 levels due
principally to increases in promotional expenses associated with introduction of
new products, trade show expenditures, and additional personnel.
Research and Development Expense. Total research and development expense
increased 42.1%, or $310,687, compared to the 3rd quarter of 1999 as a result of
additional engineering personnel, increased spending on development, testing and
prototyping of new subsystem products and enhancement and development of new
features to its already existing system products. During September 2000, the
Company announced shipment of its Version 2.5 Viewpoint VBX Software which
significantly expands the Viewpoint VBX's functionality and adds several new
features, including H.323 call capability, popular third-party codec
integration, high-quality MPEG-2 capabilities and an Internet Video Call Center
toolkit.
Other Income (Expense). During the quarter ended September 30, 2000, other
expense decreased by $57,706 to $135,267, due to an increase in interest income
generated from higher average cash and cash equivalent balances during the
current quarter and from the elimination of interest expense associated with the
amortization of debt issue costs related to Company's line of credit financing
that were fully amortized in October of 1999. Additionally, on September 14,
2000, holders of $3.0 million principal amount of 7% Senior Convertible
Debentures (the "Debentures") converted their notes to common stock of the
Company and accordingly, future periods will not include interest and
amortization of debt issue costs associated with this debt.
11
<PAGE> 12
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999.
Net Sales. Net sales for the nine months ended September 30, 2000 increased
47.5% to $7,789,540 from $5,280,282 reported during the same period last year.
The increase can be attributed to revenue growth in all Company product lines
including the Company's Osprey(R) subsystem products, ViewCast(R) streaming
servers and encoding systems, VBX(TM) video distributions systems, and
professional service and consulting revenues.
o Osprey(R) Subsystem Products. During the first nine months of 2000,
sales of Osprey codecs and video capture cards increased 44.5% over
1999 levels and represented 69.0% of year-to-date revenues compared to
70.5% of revenues during the first nine months of 1999. The increase
can be attributed to growth in demand for the Company's video capture
cards and codecs from channel partners in the Pacific Rim and Europe
and its new Osprey-500 line of video capture cards designed
specifically for the capture of broadcast-quality digital video for
streaming media. The Oprey-500DVPro was developed by ViewCast and was
optimized exclusively to support the Microsoft(R) Windows Media(TM)
Format with cooperation from Microsoft's Digital Media division. The
Company expects to see increased subsystem sales for the remainder of
2000, much of the increase due to the introduction of the Osprey-500
products which have increased average selling prices over existing
subsystem products.
o ViewCast(R) Streaming and Encoding Systems. During the nine months
ended September 30, 2000, sales of ViewCast streaming and encoding
systems increased $363,281, or 95.4%, to $743,896 from the $380,615
reported during the during the first three quarters of 1999. The
Company has incorporated its newest product offerings, the Osprey-500
and Osprey-200 series of board products, into its ViewCast line of
streaming server products to increase sales volumes.
o ViewPoint VBX(TM) Video Distribution Systems. Sales of VBX video
distribution systems for the nine months ended September 30, 2000
increased $165,474 or 15.5% compared to the same period in 1999. Sales
of VBX video distribution systems represented 15.8% of total revenues
for the nine months ended September 30, 2000 compared to 20.2% of
total revenues during the same period in 1999. During June and
September 2000, the Company sold VBX equipment to a leading Wall
Street investment management company in the U.S. Demand for VBX
systems has also increased in Europe and the Company expects sales
of its VBX systems to increase as new product features are added
and as new vertical markets are identified and developed.
o Other Revenues. Other revenues consisting of software maintenance,
training, engineering consulting fees and professional services
amounted to $433,961 for the nine months ended September 30, 2000 and
represented 5.6% of year-to-date revenues compared to 2.1% of total
revenues during the nine months ended September 30, 1999.
Cost of Goods Sold and Gross Margins. Cost of goods sold increased $772,268
to $3,656,992 for the nine months ended September 30, 2000 compared to the same
period in 1999 primarily due to increased sales described above. Gross profit
margin for the nine months ended September 30, 2000 was 53.1%, representing an
increase from the 45.4% margin reflected in the same period in 1999 due to
increased manufacturing efficiencies and the introduction of new products with
higher profit margins, namely the Osprey 500 line of video capture cards. The
Company anticipates that, over extended periods, its margins will remain in the
range of 46% - 53%.
12
<PAGE> 13
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
Selling, General and Administrative Expense. Selling, general and
administrative expenses increased from $5,336,405 during the nine months ended
September 30, 1999 to $7,026,113 during the nine months ended September 30, 2000
primarily due to the addition of eleven new sales employees and associated
overhead expenses since December of 1999. The additional employees consisted of
regional sales managers, vertical market specialists and sales engineers to
bolster sales of ViewCast streaming/encoding servers, VBX video distribution
systems and Osprey subsystem products. In addition, sales expenses were much
reduced during the first three-quarters of 1999 due to workforce reductions and
restructuring efforts instituted in the fourth quarter of 1998. Likewise,
marketing expenses during the three quarters of 2000, increased $181,321 or
32.0% over 1999 levels due primarily to increased promotional expenses
associated with introduction of new products, trade show expenditures and
additional personnel.
Research and Development Expense. During the first nine months of 2000,
total research and development expenses increased approximately 25.0%, or
$598,737, compared to same period of 1999 as a result of increased spending on
the development and testing of new subsystem products, enhancement and addition
of new features to its already existing system products. Major new product
releases during 2000 include the new Osprey-500 line of video capture cards
designed specifically for the capture of broadcast-quality digital video for
streaming media and Version 2.5 Viewpoint VBX Software release which
significantly expands the Viewpoint VBX's functionality and adds several new
features, including H.323 call capability, popular third-party codec
integration, high-quality MPEG-2 capabilities and an Internet Video Call Center
toolkit.
Other Income (Expense). During the nine months ended September 30, 2000,
total other expense decreased by $475,627 to $190,390, primarily due to an
increase in interest income generated from higher average cash and cash
equivalent balances during the current period, and from the elimination of
interest expense associated with the amortization of debt issue costs from
Company's line of credit financing which was fully amortized in October 1999. On
April 28, 2000 the Company sold $4.45 million of the Debentures and on September
14, 2000, $3.0 million principal amount of the notes were converted to common
stock. Accordingly, future periods will not include interest and amortization of
debt issue costs associated with this debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds for conducting its business
activities are from the sale of its debt and equity securities and from
operations. The Company requires liquidity and working capital primarily to fund
operating losses, increases in inventories and accounts receivable associated
with sales growth, development of its products, debt service and capital
expenditures.
Net cash used in operating activities for the nine months ended September
30, 2000 was $5,704,804 due primarily to the $6,605,175 net loss for the period
offset by changes in operating assets and liabilities of $240,938 and non-cash
operating expenses of $659,433.
Investing activities utilized cash of $507,508 during the nine months ended
September 30, 2000 for capital expenditures for computer equipment, test
equipment and purchased software to aid the development and testing of the
Company's products; for demonstration equipment to showcase its products; and
for computers for new-hires added during the three quarters of the year.
During the nine months ended September 30, 2000, the Company received
proceeds of $3,758,188 from the exercise of 1,097,245 warrants to purchase
1,116,556 shares of the Company's common stock at exercise prices ranging from
$3.00 to $4.50 per share, and gross proceeds of $348,127 from the exercise of
115,521 employee stock options to purchase 115,521 common shares of the Company
at exercise prices ranging from $2.06 to $4.63 per share. Additionally, in a
August 2000, the Company received $2,450 for
13
<PAGE> 14
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
the partial exercise of 17,500 underwriter warrants to purchase 17,500 public
warrants of the Company at an exercise price of $0.14 per public warrant.
On April 28, 2000, the Company sold $4,450,000 aggregate principal amount
of the Debentures pursuant to a placing agreement dated March 28, 2000, and
amended on April 28, 2000, by and among the Company and RP&C International Inc.
and RP&C International Limited (the "Lead Managers") at an initial offering
price of 100% of the principal amount thereof, less 8% gross commission. In
addition, the Company issued the Lead Managers a warrant (the "Warrant") on
April 28, 2000, in the name of RP&C International (Guernsey) Limited, pursuant
to Regulation S, to purchase an aggregate of 89,000 shares of Common Stock, at
an exercise price of $5.00 per share, subject to adjustment in the event of
adjustment of the Conversion Price of the Debentures. The Warrant has a term of
five (5) years and may be exercised as to all or any lesser number of shares of
Common Stock covered thereby, commencing twelve (12) months after the date of
issuance. Net proceeds to the Company from the sale of the Debentures were
$3,378,867. Effective September 14, 2000, holders of $3.0 million principal
amount of the Debentures exchanged their notes for 666,666 shares of common
stock of the Company at a conversion price of $4.50 per share. As an incentive
for early conversion, the Company paid debenture holders $35.58 per $1,000
principal amount of Debentures converted.
During September of 1998, the Company entered into a strategic business
relationship with TekInsight.com, Inc. ("TEKS"), formerly Tadeo Holdings, Inc.,
that involved a stock purchase agreement whereby the Company acquired 1,240,310
shares of TEKS common stock in exchange for 1,000,000 shares of its Common
Stock. Because all of the TEKS shares held by the Company are available for
trading under Rule 144 of the Securities and Exchange Commission, we have
presented those shares at their quoted market price on the balance sheet as of
December 31, 1999 and September 30, 2000. The quoted market price of TEKS common
stock at December 31, 1999, September 30, 2000 and October 31, 2000 was $2.75,
$2.06 and $1.56 per share, respectively.
At September 30, 2000, the Company had working capital of $7,633,272
compared to $7,575,154 at December 31, 1999 and cash and cash equivalents of
$5,642,941 at September 30, 2000 compared to $4,315,980 at December 31, 1999.
The Company experienced a 47.5% sales growth compared to the same period in
1999, and anticipates that losses will continue during 2000 and until such time
as total profit margins from the sales of its products exceed its total
development, selling, administrative and financing costs. In October of 1998,
the Company entered into a working capital line of credit financing arrangement
for up to $9,000,000 with an entity controlled by one of our principal
stockholders, who is currently our Chairman of the Board. The availability of
funds under this facility is subject to certain borrowing base limitations based
principally on outstanding accounts receivable and inventory. As of September
30, 2000, the Company had utilized $2.41 million of this facility and may
further utilize the facility to fund future growth. In October 2000, the Company
executed an agreement to extend the credit facility for one year through and
until October 22, 2001 inclusive of a provision for an automatic one-year
renewal through October 22, 2002.
The Company believes that its cash, cash equivalents and marketable
securities on hand are adequate to meet its working capital requirements for the
next seven to nine months assuming little or no sales growth. However, the
Company expects to see continued revenue growth as a result of its increased
sales, marketing and public relations efforts over the last three-quarters.
Depending on future business opportunities, product development, marketing
requirements and sales performance, the Company's plans may change or prove to
be inaccurate. Therefore, the Company may be required to raise additional
capital sooner than currently anticipated. Additional financing could include
the issuance of convertible debt, convertible preferred stock or other equity
securities in exchange for a cash investment in the Company. There can be no
assurance that any such additional financing will be available to us on
acceptable terms, or at all. Additional equity financing may involve substantial
dilution to our then existing stockholders. In the event we are unable to raise
additional capital, we may be required to substantially reduce or curtail our
activities.
14
<PAGE> 15
VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133, as amended by SFAS No.
137, establishes accounting and reporting standards for derivative financial
instruments and hedging activities and is effective for fiscal years beginning
after June 15, 2000. Based on the Company's current operating structure, the
adoption of SFAS No. 133 is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements", as amended by SAB 101A and 101B, which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. SAB 101 is required to be adopted by the Company in the
fourth quarter of 2000. Since the Company's current revenue recognition policies
effectively comply with this guidance, the adoption of SAB 101 is not expected
to have a material impact on the Company's financial position, results of
operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In Management's opinion, the Company is not subject to material market risk
except for its holdings of TekInsight.com, Inc. common stock which is discussed
in Note-6 to the financial statements and in the Liquidity and Capital Resource
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations within this Form 10-Q.
15
<PAGE> 16
VIEWCAST.COM, INC. AND SUBSIDIARIES
OTHER INFORMATION
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
(Not Applicable)
Item 2. Changes in Securities
(Not Applicable)
Item 3. Defaults Upon Senior Securities
(Not Applicable)
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on August 4,
2000 and the following proposals were submitted to a vote by proxy
of the shareholders of record on June 16, 2000:
Proposal No. 1. To elect the Board of Directors (four directors)
to serve until the next Annual Meeting of Shareholders. The
following persons were nominated for election as directors of the
Company with the following voting results:
<TABLE>
<CAPTION>
Shares
Voted Broker
Shares Against/ Share Non- Total Shares
Director Nominees Voted For Withheld Abstentions votes Results Represented
----------------- --------- -------- ----------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
H.T. Ardinger, Jr. 13,841,631 229,237 -- -- Elected 14,070,868
Joseph Autem 13,912,131 158,737 -- -- Elected 14,070,868
George C. Platt 13,912,131 158,737 -- -- Elected 14,070,868
David A. Dean 13,912,131 158,737 -- -- Elected 14,070,868
</TABLE>
Proposal No. 2. To increase the authorized shares reserved for the
1995 Employee Stock Purchase Plan from 250,000 shares to 500,000
shares:
<TABLE>
<CAPTION>
Shares
Voted Broker
Shares Against/ Share Non- Total Shares
Proposal Voted For Withheld Abstentions votes Results Represented
-------- --------- -------- ----------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Increased in
Authorized Shares 5,071,937 376,950 261,203 8,360,778 Pass 14,070,868
</TABLE>
Proposal No. 3. Amendment of the 1995 Employee Stock Option Plan
to increase the number of shares available under the plan from
4,900,000 shares to 5,900,000 shares:
<TABLE>
<CAPTION>
Shares
Voted Broker
Shares Against/ Share Non- Total Shares
Proposal Voted For Withheld Abstentions votes Results Represented
-------- --------- -------- ----------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Amend 1995
Employee Stock
Option Plan 5,024,622 407,797 277,671 8,360,778 Pass 14,070,868
</TABLE>
16
<PAGE> 17
Proposal No. 4. To ratify the appointment of Ernst & Young, LLP as
the Company's independent public accountants for the year ending
December 31, 1999. Voting results were as follows:
<TABLE>
<CAPTION>
Shares
Voted Broker
Shares Against/ Share Non- Total Shares
Proposal Voted For Withheld Abstentions votes Results Represented
-------- --------- -------- ----------- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ernst & Young,
LLP Ratification 13,916,128 75,590 79,150 -- Pass 14,070,868
</TABLE>
Item 5. Other Information
(None)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report:
Exhibit 27: Financial Data Schedule
(b) Reports on Form 8-K
On September 27, 2000, the Company filed a Form 8-K describing
the conversion of $3.0 Million of principal amount 7% Senior
Convertible Debentures to common stock of the Company
17
<PAGE> 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.
ViewCast.com, Inc.
---------------------------
(registrant)
BY:
Date: November 14, 2000 /s/ Laurie L. Latham
---------------------------
Laurie L. Latham
Chief Financial Officer
Principal Financial Officer
18
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
