VCST ViewCast com Inc (CE)

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

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

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The accompanying notes are an integral part of this condensed consolidated statement.

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

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1. Basis of Presentation and Liquidity

The accompanying consolidated interim unaudited financial statements include the accounts of ViewCast.com, Inc. doing business as ViewCast Corporation and its wholly-owned subsidiaries, VideoWare, Inc., Osprey Technologies, Inc., ViewCast Solutions, Inc. p/k/a Ancept Corporation, and ViewCast Technology Services Corporation (collectively, ViewCast or the Company). The Company develops industry-leading hardware and software for the capture, management, transformation and delivery of digital media over IP and mobile networks. ViewCast’s solutions simplify the complex workflows required for these tasks, allowing broadcasters, businesses, and governments to reach and expand their use and distribution of their digital media easily and effectively. ViewCast’s Niagara® streaming appliances and Osprey® video capture cards provide the highly reliable technology required to deliver the multi-platform experiences driving today’s digital media market. ViewCast markets and sells its products and professional services worldwide directly to end-users or through indirect channels including original equipment manufacturers (“OEMs”), value-added resellers (“VARs”), resellers, distributors and computer system integrators.

These consolidated interim unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Exchange Act of 1934, as amended. 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 of normal recurring adjustments) considered necessary for a fair presentation have been included for the three month period ended March 31, 2013. The condensed consolidated balance sheet of the Company as of December 31, 2012 has been derived from the audited consolidated balance sheet as of that date. The results for the three month period ended March 31, 2013 are not necessarily indicative of the results that may be expected for the full year. The unaudited financial statements included in this filing should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s annual report on Form 10-K, as amended by Amendment No. 1 there to, for the year ended December 31, 2012.

During the first quarter of 2013, net cash provided from operating activities for the three months ended March 31, 2013 was $236,718 resulting from a net loss of $457,797, plus non-cash operating expense of $113,694 and net cash provided from changes in operating assets and liabilities of $580,821. At March 31, 2013, the Company had working capital of $1,060,809 and cash and cash equivalents of $223,396. The Company expects to obtain additional working capital by increasing revenue, reducing operating expenses, borrowing on its line of credit and through other initiatives that may include raising additional capital through issuing debt and/or equity securities. There can be no assurance that additional capital will be available to the Company on acceptable terms, or at all. Additional equity financing may involve substantial dilution to its then existing stockholders. The Company believes that these items will provide sufficient cash to fund operations for the next 12 months, however, the Company may require additional working capital during 2013 to support operations and the expansion of sales channels and market distribution, to develop and introduce new products and services, to enhance existing product offerings, to address unanticipated competitive threats or technical problems, to transition adverse economic conditions and for potential acquisition transactions. In the event the Company is unable to raise additional debt and/or equity capital or execute other alternatives, it may be required to sell segments of the business, or substantially reduce or curtail its activities. However, no assurance can be given that we will be able to sell any segments of the business on terms that are acceptable to us. Such actions could result in charges that could be material to ViewCast’s results of operations or financial position.

2. Accounts Receivable

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

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Changes in the Company’s allowance for doubtful accounts for the three months ended March 31, 2012 and 2013 are as follows:

3. Inventories

Inventories consisted of the following:

4. Sale of Ancept Assets and Contingent Consideration

On January 15, 2012, ViewCast completed the sale of certain assets from Ancept Corporation (the “Ancept Assets”) related to the development and licensing of the VMp software products that provide the management of the life cycle phases of digital media pursuant to the terms of the Asset Purchase Agreement dated January 13, 2012, by and between ViewCast, Ancept Corporation, Genus Technologies LLC and its subsidiary, (the “Purchase Agreement”). ViewCast’s wholly-owned subsidiary, Ancept Corporation, was renamed ViewCast Solutions, Inc. (“VSI”) and no longer operates this business.

Upon the terms and subject to the conditions of the Purchase Agreement, the buyer agreed to pay an earn-out payment as follows: until the earlier of paying VSI $650,000 or January 15, 2017 (the “Earn-Out Period”), the buyer shall pay VSI on a quarterly basis a percentage of the net license fees, subscription fees and similar revenues paid or payable to the buyer or otherwise earned by buyer with respect to the software sold from Ancept to the buyer (“Net Software License Revenue”). The buyer agreed to pay VSI (i) 20% of the Software License Revenue from sales opportunities in the pipeline on January 15, 2012 and from post-closing referrals from ViewCast plus (ii) 10% of Net Software License Revenue, up to a maximum of $400,000, generated from buyer’s customers not derived from ViewCast. Prior to January 15, 2014, the buyer may terminate the earn-out payment obligations by paying VSI $400,000 which amount shall not be reduced by any prior earn-out payments. On or after January 15, 2014 until the end of the Earn-Out Period, Buyer may terminate the earn-out payment obligations by paying Ancept $650,000 less any prior earn-out payments. The buyer also assumed specified liabilities related to the Ancept Assets and paid $47,026 in cash to VSI.

Proceeds from the sale totaled $592,976 comprised of the following: cash of $47,026, receivable for future earn out consideration of $227,531, and liabilities assumed by the buyer of $318,419. The carrying value of the reporting unit approximated the proceeds received on the date of the transaction; as a result, a loss of $2,047 was recorded on the sale. Management recorded the contingent earn out consideration at estimated fair value determined using discounted estimated future cash flows. Subsequent to the sale, proceeds received under the arrangement will be applied to the carrying value of the asset. At December 31, 2012, the Company recorded an impairment of earn-out receivable in the amount of $80,000.

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The net loss from discontinued operations related to the Ancept for the three months ended March 31, 2012 is as follows:

5. Intangible Assets

Intangible assets consisted of the following:

Future amortization expense associated with these intangible assets is as follow:

6. Accrued Expenses

Accrued expenses consisted of the following:

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7. Warranty Reserves

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

The following table shows the changes in accrued warranty expense for the three months ended March 31, 2012 and 2013:

8. Property and Equipment

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

9. Line of Credit

On June 29, 2007, the Company entered into a Purchase and Sale Agreement/Security Agreement (the “Agreement”) with Amegy Bank National Association (“Amegy”), a national banking association. The Agreement provides the Company with an accounts receivable loan facility to provide a source of working capital with advances generally limited to 85% of submitted accounts receivable. Upon collection of an account receivable, the remaining fifteen percent is rebated to the Company less the Agreement’s fixed and variable discounts. The fixed discount equals 0.2% of the account receivable for the first 15 days the account receivable is outstanding plus an additional 0.2% for each additional 15 day period, up to 1.2% for receivables 76 to 90 days outstanding. The variable discount is calculated for each day that the amount advanced by Amegy is outstanding until repaid by collection of the account receivable and equals the prime rate plus 1.5% divided by 360 multiplied by the advance amount for each account receivable. The borrowing line under this facility is $1,000,000, reviewed as growth of business dictates. To secure the amounts due under the agreement, the Company granted Amegy a security interest in all of its assets owned as of the date of the agreement or thereafter acquired. The Company had $1,143,920 and $897,772 outstanding as of December 31, 2012 and March 31, 2013, respectively, under this facility. There is no expiration date to the agreement.

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10. Long-Term Debt

Since October 1998, the Company has maintained a credit facility with an entity controlled by the Ardinger Family Partnership, LTD., the estate of one of its principal stockholders, Mr. H.T. Ardinger. Most recently, ViewCast.com, Inc., Osprey Technologies, Inc. and VideoWare, Inc. (jointly and severally, “the Borrower”) amended the terms and conditions of the loan and security agreement with the Ardinger Family Partnership, Ltd. on December 30, 2011, to be effective as of October 1, 2011. Under the amended terms any amounts outstanding of the primary principal amount and secondary principal amount mature December 31, 2014, subject to certain earlier payment conditions. The interest on the primary principal amount will accrue based on an interest rate per annum which is the greater of 5.0% or the effective prime rate plus 0.75% (5.00% as of December 31, 2012 and March 31, 2013, respectively). Interest on the secondary principal shall accrue based on the effective Applicable Federal Rate, as defined in the agreement, (0.21% and 0.22% as of December 31, 2012 and March 31, 2013, respectively). The amendment defers the payment of the accrued interest on the unpaid primary and secondary principal amounts from October 1, 2011 through March 31, 2012. Beginning April 30, 2012, payment of such accrued interest was paid in three approximately equal monthly payments. The amended terms call for interest accruing after March 31, 2012 to be paid monthly; and beginning July 31, 2012, minimum monthly principal payments of $21,422, in addition to the monthly interest payments. Accrued interest was $10,769 and $21,017 at December 31, 2012 and March 31, 2013, respectively. The amended note agreement is secured by all the assets of the Borrower.

The Company’s long-term debt consisted of:

Other debt consists of capital leases for equipment.

11. Earnings Per Share Data

Basic earnings per share is calculated by dividing net income or loss applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by using the weighted-average number of common shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. Dilutive potential shares of common stock include convertible preferred stock, options and warrants. The potential dilution for options and warrants is based on the average market price during the period. The average market price of the common stock was $0.0673 during the three months ended March 31, 2013. For periods presented, the computation of diluted loss per share excludes the portion of convertible preferred stock, options and warrants that are anti-dilutive.

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The following table sets forth the computation of basic and diluted earnings per share:

12. Stock-Based Compensation

The Company has various stock-based employee compensation plans, which are described more fully in Note 10 of the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, as amended by Amendment No. 1 thereto.

Stock-based compensation expense was $27,348 and $24,546 for the three months ended March 31, 2012 and March 31, 2013, respectively. There were 2,025,000 new options granted by the Company during the three months ended March 31, 2013. Stock-based compensation expense is based on awards ultimately expected to vest and has been reduced for estimated forfeitures.

The Company uses the Black-Scholes option-pricing model (“Black-Scholes”) as its method of valuation of stock options granted. This fair value is amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. The fair value of share-based payment awards on the date of grant as determined by the Black-Scholes model is affected by our stock price as well as other assumptions. These assumptions include, but are not limited to the expected stock price volatility over the term of the awards and the actual and projected employee stock option exercise behaviors.

At March 31, 2013, the balance of unearned stock-based compensation to be expensed in future periods related to unvested share-based awards, as adjusted for expected forfeitures, was approximately $221,000. The weighted-average period over which the unearned stock-based compensation is expected to be recognized is approximately three years.

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The following table is a summary of stock option activity from January 1, 2013 through March 31, 2013:

The following information applies to options outstanding at March 31, 2013:

13. Income Taxes

At December 31, 2012 the Company has federal income tax net operating loss carryforwards of approximately $65,000,000, which expire at various dates beginning in 2017. The Company is subject to limitations existing under Internal Revenue Code Section 382 (Change of Control) relating to the availability of the operating loss carryforward. The Company recognized no federal income tax benefit in the first quarter of 2013 as it has recorded a valuation allowance to reduce all deferred tax assets to zero.

14. Stockholders’ Equity

Preferred Stock

In December 2006, the Company retired certain debt from the Ardinger Family Partnership in exchange for certain Company securities, including 80,000 shares of Series E Preferred Stock with each share having a stated value of $100 with voting rights on an “as converted’ basis with the Common Stock and accruing no dividends. The liquidation preference on the Series E Preferred Stock is the $100 per share stated value multiplied by 107% if the liquidation event occurs after December 11, 2010. The Series E Preferred Stock provides for a conversion option to common stock at $0.60 per share of common stock, subject to certain requirements and adjustments.

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Common Stock

In January 2012, the Company received net proceeds of $320,000 from private placement units subscribed for on December 27, 2011 of 2,842,660 shares of Common Stock and warrants to purchase 2,842,660 shares of Common Stock. The purchase price per share of a private placement unit was $0.1125707, which was the weighted average closing price for the five trading days immediately prior to December 27, 2011. The warrants have an exercise price of $0.1238278 per share of Common Stock with an expiration date of December 31, 2014.

Warrants

At December 31, 2012 and March 31, 2013, the Company had outstanding warrants to purchase 6,618,068 shares of Common Stock with an exercise price of $0.1238278 per share of Common Stock and expiration date of December 31, 2014.

15. Fair Value of Financial Instruments

The Company believes that the carrying amount of its financial instruments, which include cash and cash equivalents, receivable from sale of assets, and short-term debt, approximate fair value.  The Company also has long-term debt with its primary shareholder, of which fair value is not practical to determine.  Cash and cash equivalents fall within Level 1 of the valuation hierarchy.  Receivable from sale of assets and short-term debt fall within Level 3 of the valuation hierarchy.

16. Related Party Transactions

As discussed in Notes 10 and 18, the Company has outstanding notes payable to the Ardinger Family Partnership, Ltd., an entity controlled by the estate of one of its principal stockholder, Mr. H.T. Ardinger, Jr.

On December 27, 2011, ViewCast entered into the Subscription Agreements with the Investors for the purchase of private placement units consisting of an aggregate 6,618,068 shares of Common Stock and Warrants to purchase 6,618,068 shares of Common Stock for an aggregate purchase price of $745,000, of which $425,000 was received in December 2011 and the remaining $320,000 was received in January 2012. The purchase price per private placement unit was $0.1125707, which was the weighted average closing price for the five trading days immediately prior to December 27, 2011. Pursuant to the Subscription Agreements, the Warrants are exercisable into shares of Common Stock at an exercise price of $0.1238 per share of Common Stock which was 110% of the weighted average closing price for the five trading days immediately prior to December 27, 2011. The Warrants will expire on December 31, 2014.

The following Investors have a relationship to the Company and subscribed for the following number of shares of Common Stock and Warrants exercisable into the same number of shares of Common Stock:

David W. Brandenburg RIRA – 888,331 shares

Diana L. Brandenburg RIRA – 888,331 shares

John C. Hammock – 888,331 shares

Lance E. Ouellette – 888,331 shares

George C. Platt – 177,667 shares

Messrs. Brandenburg, Hammock, Ouellette and Platt are directors of the Company and Mr. Hammock is the President and Chief Executive Officer of the Company. They acquired the shares of Common Stock on the same terms as the other seven Investors. Mr. Ouellette is the stepson of the recently deceased H.T. Ardinger, Jr., a principal stockholder of the Company. There are no additional material relationships between the Company and the Investors aside from entering into the Subscription Agreements. Each of the Investors was an “accredited investor” at the time of their investment as defined under Rule 501 promulgated pursuant to the Securities Act of 1933, as amended (the “Securities Act”), and the shares of Common Stock and the Warrants were issued pursuant to Rule 506 promulgated pursuant to the Securities Act.

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17. Current Economic Conditions

The current economic environment continues to present companies with difficult circumstances and challenges, which in some cases have resulted in large and unanticipated declines in the fair value of certain assets, declines in the volume of business, constraints on liquidity and difficulty obtaining financing. The financial statements have been prepared using values and information currently available to the Company.

Current economic and financial market conditions could adversely affect the Company’s results of operations in future periods. The current instability in the financial markets may make it difficult for certain of the Company’s customers to obtain financing, which may significantly impact the volume of future sales which could have an adverse impact on the Company’s future operating results.

In addition, given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial statements could change rapidly, resulting in material future adjustments in allowances for accounts receivable, inventory and valuation of intangibles.

18. Subsequent Event

On May 6, 2013, the Company entered into a Loan and Security Agreement effective April 30, 2013 (the “Loan Agreement”) with Ardinger Family Partnership, Ltd. (“Ardinger”) whereby Ardinger agreed to make a term loan to the Company in the amount of $550,000.  The interest rate on the unpaid principal amount under the Loan Agreement is seven and a half percent (7.5%) per annum.  Interest on the unpaid principal amount under the Loan Agreement is due in full at maturity.  Within fifteen (15) days after each month end, beginning with the month ending May 31, 2013, the Company shall pay a portion of the indebtedness under the Loan Agreement in an amount equal to five percent (5.0%) of the Company’s total revenue or income earned during such prior month before any deductions or allowances.  Within three (3) business days of the Company receiving the net proceeds of any asset sale that is not in the ordinary course of business, the Company shall pay a portion of the indebtedness under the Loan Agreement in an amount equal to one hundred percent (100%) of the net proceeds of such sale.  The maturity date is April 30, 2015, subject to certain exceptions.  

Absent approval from Ardinger, the Loan Agreement prohibits the Company from taking certain actions, including, but not limited to (i) incurring any lien on any of its assets, subject to certain exceptions; (ii) incurring indebtedness in excess of $250,000 in any fiscal year, subject to certain exceptions; (iii) granting any dividends on any equity interest of the Company; (iv) liquidating, merging, or consolidating with or into any entity; or (v) making capital expenditures in excess of $100,000 in any fiscal year; or (vi) creating, incurring, assuming, or suffering, to exist, any obligations as lessee under any lease, except leases in an aggregate amount less than $500,000 in any fiscal year and with lease terms of thirty-six (36) months or less . The Company ratified and confirmed existing liens previously granted by the Company to Ardinger and granted to Ardinger a first priority lien and security interest in and to all of the collateral granted under the prior loan agreement between the same parties, which loan agreement is still in existence.

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