-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JWzp4IiJb4wFGd5+acPIPw49WJh9kKUxPX1RlyZHCj9Q1ok5ahBV/npoHKDvSkhd Uk3PhTtk56qcz5FMIoEXJg== 0001023175-05-000278.txt : 20051122 0001023175-05-000278.hdr.sgml : 20051122 20051122165626 ACCESSION NUMBER: 0001023175-05-000278 CONFORMED SUBMISSION TYPE: 10QSB/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20051122 DATE AS OF CHANGE: 20051122 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROADCAST INTERNATIONAL INC CENTRAL INDEX KEY: 0000740726 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 870395567 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-13316 FILM NUMBER: 051221844 BUSINESS ADDRESS: STREET 1: 7050 UNION PARK AVENUE, #600 CITY: SALT LAKE CITY STATE: UT ZIP: 84047 BUSINESS PHONE: 801-562-2252 MAIL ADDRESS: STREET 1: 7050 UNION PARK AVENUE #600 CITY: SALT LAKE CITY STATE: UT ZIP: 84047 FORMER COMPANY: FORMER CONFORMED NAME: LASER CORP DATE OF NAME CHANGE: 19920703 10QSB/A 1 broad10qsbajune.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Quarterly Period ended June 30, 2005 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transitional period ________ to __________. Commission File Number: 0-13316 BROADCAST INTERNATIONAL, INC. (Exact name of small business issuer as specified in its charter) Utah 87-0395567 (State of Incorporation) (IRS Employer Identification No.) 7050 Union Park Ave. #600, Salt Lake City, Utah 84047 (Address of Principal Executive Offices) (Zip Code) (801) 562-2252 (Issuer's telephone number, including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ( x ) Yes ( ) No Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ( ) Yes ( x ) No State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. Class Outstanding as of July 31, 2005 ------------ ------------------------------- Common Stock 20,839,851 shares Transitional Small Business Disclosure Format: Yes ( ) No ( X ) 1 Explanatory Note The purpose of this Amendment No.1 to the Quarterly Report on Form 10-QSB is to restate the Company's consolidated condensed financial statements for the three and six months ended June 30, 2005 (the "Financial Statements") and to modify the related disclosures. Please see Note C to the Financial Statements included in the accompanying Form 10-QSB. The Company raised $3,000,000 of gross proceeds from Senior Secured Convertible Notes on May 16, 2005, and those notes included warrants and a conversion feature, which conversion rate was subject to adjustment. The terms of these notes have been previously disclosed, and the Company had previously accounted for this offering under the provisions of EITF 00-27. The restatement arose from the Company's determination, upon further research and consideration, that the warrants and embedded conversion option of the senior secured convertible notes entered into on May 16, 2005 are accounted for as imbedded derivatives pursuant to EITF 00-19 and SFAS No. 133, instead of accounting for such features using beneficial conversion feature accounting pursuant to EITF 00-27. The Company has determined that the fair value of the derivatives should be recorded as a liability, with any changes in fair value of the derivatives between reporting dates as a derivative gain or loss, as appropriate. This amended Form 10-QSB/A does not attempt to modify or update any other disclosures set forth in the original Form 10-QSB for the quarterly period ended June 30, 2005, except as required to reflect the effects of the restatement as described in Note C to the Financial Statements included in the amended Form 10-QSB/A and to clarify the provisions of the senior secured convertible notes. Additionally, this amended Form 10-QSB/A, except for the restatement information, speaks as of the filing date of the original Form 10-QSB and does not update or discuss any other Company developments after the date of the original filing. All information contained in this amended Form 10-QSB/A and the original Form 10-QSB is subject to updating and supplementing as provided in the periodic reports that the Company has filed after the original filing date with the Securities and Exchange Commission. 2 Broadcast International, Inc. Form 10-QSB Table of Contents Part I - Financial Information Page Item 1. Financial Statements 4 Item 2. Management's Discussion and Analysis or Plan of Operation 16 Item 3. Controls and Procedures 24 Part II - Other Information Item 1. Legal Proceedings 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25 Item 3. Defaults Upon Senior Securities 25 Item 4. Submission of Matters to a Vote of Security Holders 25 Item 5. Other Information 25 Item 6. Exhibits 25 Signatures 28 3 BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEET (Unaudited) June 30, 2005 ASSETS ------------- - ------ (Restated) Current assets Cash and cash equivalents $ 2,267,340 Trade receivable, net 341,874 Inventory 22,642 Prepaid expenses 1,083,270 ------------- Total current assets 3,715,126 ------------- Non-current assets Equipment and leasehold improvements, net 628,621 Patents net 192,273 Other assets 7,824 ------------- Total assets $ 4,543,844 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT - ------------------------------------- Current liabilities Accounts payable $ 200,164 Accrued Payroll & related expenses 156,965 Other accrued liabilities 83,540 Unearned revenue 135,304 Current debt obligations 915,153 Derivative valuation liability 5,974,027 ------------- Total current liabilities 7,465,153 ------------- Long-term debt Long-term obligations 265,373 Deferred bonus 600,000 ------------- Total liabilities 8,330,526 ------------- Stockholders' equity Preferred stock, no par value, 10,000,000 shares authorized; no shares issued - Common stock, $.05 par value, 40,000,000 shares authorized; 20,839,851 shares issued and outstanding 1,041,993 Additional paid-in capital 20,941,776 Accumulated deficit (25,770,451) ------------- Total stockholders' deficit (3,786,682) ------------- Total liabilities and stockholders' deficit $ 4,543,844 ============= See accompanying notes to consolidated condensed financial statements 4
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended -------------------------- ----------------------------- June 30, June 30, June 30, June 30, 2005 2004 2005 2004 ------------- ------------- -------------- -------------- (Restated) (Restated) NET SALES $ 999,495 $ 1,556,040 $ 1,977,146 $ 2,931,896 COST OF SALES 1,232,373 1,511,644 2,335,722 2,869,691 ------------- ------------- -------------- -------------- GROSS PROFIT (LOSS) (232,878) 44,396 (358,576) 62,205 OPERATING EXPENSES Research and development in process - 10,343,945 - 11,519,377 Administrative and general 678,775 296,504 952,291 989,025 Selling and marketing 229,806 265,086 378,225 458,266 ------------- ------------- -------------- -------------- TOTAL OPERATING EXPENSES 908,581 10,905,535 1,330,516 12,966,668 ------------- ------------- -------------- -------------- LOSS FROM OPERATIONS (1,141,459) (10,861,139) (1,689,092) (12,904,463) OTHER INCOME (EXPENSE): Interest and other income 31,390 14,958 34,890 17,403 Derivative valuation gain (loss) (2,974,027) - (2,974,027) - Interest expense (385,885) (445,657) (635,799) (795,306) ------------- ------------- -------------- -------------- TOTAL OTHER INCOME (EXPENSE) (3,328,522) (430,699) (3,574,936) (777,903) ------------- ------------- -------------- -------------- LOSS BEFORE INCOME TAXES (4,469,981) (11,291,838) (5,264,028) (13,682,366) Income Tax Benefit - - - - ------------- ------------- -------------- -------------- NET LOSS $ (4,469,981) $(11,291,838) $ (5,264,028) $ (13,682,366) ============= ============= ============== ============== TOTAL NET LOSS PER SHARE - Basic and Diluted $ (.22) $ (.59) $ (.25) $ (.73) ============= ============= ============== ============== Weighted average number of shares of Common Stock outstanding - Basic and Diluted 20,775,400 19,019,800 20,718,500 18,663,500 ============= ============= ============== ============== See accompanying notes to consolidated condensed financial statements 5
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended --------------------------- June 30, June 30, 2005 2004 -------------- -------------- (Restated) CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (5,264,028) $ (13,682,366) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 183,440 202,199 Beneficial conversion 449,876 795,230 Common stock issued for services 235,170 420,000 Derivative liability valuation 2,974,027 - Accretion of note payable 125,000 - Common stock and options issued for research and development in process - 10,228,019 Liabilities assumed for research and development in process - 1,291,358 Provision for losses on accounts receivable 6,747 26,000 (Increase) decrease in: Receivables 129,477 (287,645) Inventories (2,576) 50,334 Prepaid and other assets (208,193) (15,903) Increase (decrease) in: Accounts payable and accrued expenses 55,355 70,594 Unearned revenue (69,774) (51,822) -------------- -------------- Net cash used in operating activities (1,385,479) (954,002) -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of equipment (47,151) (32,779) Technology patents (13,329) (137,552) -------------- -------------- Net cash used in investing activities (60,480) (170,331) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on debt (35,093) (13,830) Related party note receivable, net - (182,800) Proceeds from the sale of stock 124,980 465,362 Loan proceeds, net 3,449,876 795,230 -------------- -------------- Net cash provided by financing activities 3,539,763 1,063,962 -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,093,804 (60,371) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 173,536 314,667 -------------- -------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,267,340 $ 254,296 ============== ============== See accompanying notes to consolidated condensed financial statements 6
BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) June 30, 2005 NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements of Broadcast International, Inc. (the "Company") have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly, they do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary, in order to make the financial statements not misleading, have been included. Operating results for the three months and the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 2004 included in the Company's Annual Report on Form 10-KSB (file number 000-13316). NOTE B - RECLASSIFICATIONS Certain 2004 financial statement amounts have been reclassified to conform to 2005 presentations. NOTE C - RESTATEMENT OF FINANCIAL STATEMENTS The Company's previously issued consolidated condensed financial statements as of and for the three and six months ended June 30, 2005 have been restated to record the accounting of the warrants and embedded conversion option of the senior secured convertible notes, entered into on May 16, 2005, as liabilities, resulting in an increase to current liabilities, rather than as being recorded as equity. As a result of this restatement, the Company recorded $5,974,027 of additional current liability related to the fair value of the warrants and conversion feature of the notes, with a reduction of $3,000,000 in equity along with an additional expense of $2,974,027 recorded as loss for derivative valuation as of the three and six months ended June 30, 2005. Additionally, the Company reclassified $31,390 and $14,598 of interest and other income included as sales to other income and expense for the three months ended June 30, 2005 and 2004, respectively, and $34,890 and $17,403 of interest and other income included as sales to other income and expense for the nine months ended June 30, 2005 and 2004, respectively. These reclassifications had no effect on net loss in the respective periods. The following table summarizes the effect of the restatement and reclassification adjustments on the financial statements as of and for the three and six months ended June 30, 2005. 7
Three Months Ended Six Months Ended ---------------------------- ---------------------------- June 30, June 30, June 30, June 30, 2005 2005 2005 2005 -------------- ------------- -------------- ------------- (Restated) (Previously (Restated) (Previously Reported) Reported) NET SALES $ 999,495 $ 999,495 $ 1,977,146 $ 1,977,146 COST OF SALES 1,232,373 1,232,373 2,335,722 2,335,722 TOTAL OPERATING EXPENSES 908,581 908,581 1,330,516 1,330,516 -------------- ------------- -------------- ------------- LOSS FROM OPERATIONS (1,141,459) (1,141,459) (1,689,092) (1,689,092) OTHER INCOME (EXPSNSE): Interest and other income 31,390 31,390 34,890 34,890 Derivative valuation gain (loss) (2,974,027) - (2,974,027) - Interest expense (385,885) (385,885) (635,799) (635,799) -------------- ------------- -------------- ------------- TOTAL OTHER INCOME (EXPENSE) (3,328,522) (354,495) (3,574,936) (600,909) -------------- ------------- -------------- ------------- NET LOSS $ (4,469,981) $ (1,495,954) $ (5,264,028) $ (2,290,001) ============== ============= ============== =============
June 30, 2005 -------------------------------- (Restate) (Previously Reported) Total current liabilities 7,465,153 1,491,126 Total liabilities 8,330,526 2,356,499 Additional paid-in capital 20,941,776 23,941,776 Accumulated deficit (25,770,451) (22,796,424) Total stockholders' equity (deficit) (3,786,682) 2,187,345 NOTE D - WEIGHTED AVERAGE SHARES The computation of basic earnings (loss) per common share is based on the weighted average number of shares outstanding during each period. The computation of diluted earnings per common share is based on the weighted average number of common shares outstanding during the period, plus the common stock equivalents that would arise from the exercise of stock options and warrants outstanding, using the treasury stock method and the average market price per share during the period. Options to purchase 7,775,596 and 6,030,903 shares of common stock at prices ranging from $.02 to $60.00 per share were outstanding at June 30, 2005 and 2004, respectively, and 3,244,966 shares of stock would be issuable to the holders of the convertible line of credit and the senior secured convertible notes and related warrants if the conversion features of such instruments or the warrants were exercised. All of the common stock equivalents were excluded for the calculation of diluted earnings per share because the effect of including such common stock equivalents would be anti-dilutive. NOTE E - STOCK COMPENSATION The Company accounts for stock-based compensation under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No common stock was issued for compensation during the six months and three months ended June 30, 2005, however 8 during the six months ended June 30, 2004, 5,000 shares of common stock were issued to an individual of the management of the Company. The amount of expense recognized on the 2004 income statement was $20,000, which is included in stock issues for services. No options to purchase shares of the Company's common stock were granted as compensation to employees and management during the three and six months ended June 30, 2005, as well as the three months ended June 30, 2004, however, options to purchase 258,000 shares of the Company's common stock were granted to employees and management for six months ended June 30, 2004. All options granted had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant. The options vested during the three and six months ended June 30, 2005 would have the following effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS Statement No. 123, Accounting for Stock-Based Compensation:
Three Months Ended Six Months Ended June 30, June 30, 2005 2004 2005 2004 -------------- ------------- -------------- ------------- (Restated) (Restated) Net loss, as reported $ (4,469,981) $(11,291,838) $ (5,264,028) $(13,682,366) Addback: Stock-based employee compen- sation expense determined under intrinsic value based method for all awards, net of related tax effects - - - - Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (52,427) (124,767) (177,194) (241,973) -------------- ------------- -------------- ------------- Pro forma net loss $ (4,522,408) $(11,416,605) $ (5,441,222) $(13,924,339) ============== ============= ============== ============= (Loss) earnings per share: Basic and diluted - as reported $ (.22) $ (.59) $ (.25) $ (.73) ============== ============= ============== ============= Basic and diluted - pro forma $ (.22) $ (.60) $ (.26) $ (.75) ============== ============= ============== =============
The weighted average fair value of options granted during the six months ended June 30, 2004 was $3.07 per share. The fair value for the options granted in the six months ended June 30, 2004 were estimated at the date of grant using a Black Scholes option pricing model with the following weighted average assumptions: Risk free interest rate 4.04% Expected life (in years) 8 Expected volatility 37.49% Expected dividend yield 0.00% NOTE F - SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition The Company recognizes revenue when evidence exists that an arrangement exists between the Company and its customers, delivery of the Company's product or service has occurred, the Company's selling price to its customers is fixed and determinable, and collectibility is reasonably assured. The Company recognizes, as deferred revenue, billings made to clients for services for which the services have not yet been provided, and therefore the earnings process is not complete. 9 When the Company enters into a multi-year contract to provide customers with network management and on-site service, the Company recognizes the network management fee, as far as can be determined, equally over the period of the agreement. These agreements typically provide for additional fees, as needed, to be charged if on-site visits are required by the customer in order to ensure that each customer location is able to receive network communication. These occasional on-site visits are preformed by third-party technicians, with the associated revenue and cost recognized in the period the work is completed. Additionally, in some cases the Company installs, for an additional fee, new or replacement equipment to customer locations, which immediately becomes the property of the customer, with the associated revenue and cost recorded in the period in which the work is completed. Patents Patents represent legal and filing costs incurred to apply for United States as well as international patents on the CodecSys technology. Once granted these costs are amortized on a straight-line basis over their useful life, averaging approximately 15 years. As of June 30, 2005 one patent has been granted with the associated amortization expense recognized of $139 for the six months ended June 30, 2005. If all additional patents were granted prior to December 31, 2005 the estimated amortization expense on patents for each of the next five years would be as follows: Year ending December 31: 2005 $ 5,965 2006 11,930 2007 11,930 2008 11,930 2009 11,930 Long-Lived Assets We review our long-lived assets, including patents, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets held and used is measured by a comparison of the carrying amount of an asset to future un-discounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, then the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Fair value is determined by using cash flow analyses and other market valuations. NOTE G - LONG-TERM NOTES PAYABLE On May 16, 2005, the Company consummated a private placement of $3,000,000 principal amount of 6% senior secured convertible notes and related securities, including common stock warrants and additional investment rights. The senior secured convertible notes are due May 16, 2008, and are convertible into 1,200,000 shares of common stock at a conversion price of $2.50 per share. Specifically, this transaction may ultimately result in gross proceeds to the Company of up to $13,800,000 if the additional investment rights and warrants to purchase common stock of the Company are exercised in full. In connection with 10 these notes, the Company has filed a registration statement on Form SB-2 with the Securities and Exchange Commission registering the resale of shares of common stock issuable upon conversion of the notes and upon exercise of the warrants. The Company issued to the note holders a total of 600,000 A warrants and 600,000 B warrants to purchase common stock with an exercise price of $2.50 and $4.00, respectively. The $2.50 conversion price of the senior secured convertible notes and the $2.50 and $4.00 exercise price of the A Warrants and the B Warrants, respectively, are subject to adjustment pursuant to standard anti-dilution rights. These rights include (i) equitable adjustments in the event we effect a stock split, dividend, combination, reclassification or similar transaction; (ii) "weighted average" price protection adjustments in the event we issue new shares of common stock or common stock equivalents in certain transactions at a price less than the then current market price of our common stock; and (iii) "full ratchet" price protection adjustments in the event we issue new shares of common stock or common stock equivalents in certain transactions at a price less than $2.50 per share. The conversion price of the notes and the exercise price of the warrants are also subject to adjustment pursuant to a "reset" provision which is effective as of February 16, 2006. If the moving average closing price of our common stock for the 30 days prior to such date is lower than the applicable conversion price of the notes or the exercise price of the warrants, then the applicable conversion price and/or exercise price will be adjusted to the lower moving average closing price. In no event, however, will the conversion price or exercise price be adjusted below $0.50 per share. The conversion features of the notes were accounted for as embedded derivatives and valued on the transaction date using a Black-Scholes pricing model and recorded as a liability. The warrants were accounted for as derivatives and valued on the transaction date using a Black-Scholes pricing model and recorded as a liability as well. At each reporting date, the value of the conversion feature and the warrants and are evaluated and adjusted to current market value. The note conversion feature and the warrants may be exercised at any time and have, therefore, been reported as current liabilities. The fair value of the aggregate derivative liability of the conversion feature and the warrants as of June 30, 2005 was $5,974,027. The principal value of the senior secured convertible notes is being accreted over the term of the obligation, and for the three and six months ended June 30, 2005, $125,000 has been included in interest expense. The notes bear a 6% annual interest rate payable semi annually, and for the three and six months ended June 30, 2005, $22,500 is included in interest expense. The lending agreements contain a requirement that the Company secure an effective registration statement with the Securities and Exchange Commission within 120 days from the date of the borrowings. The registration statement filed by the Company has not been declared effective and therefore, the Company is required to pay a penalty of 2% of the borrowed amount per month commencing September 15, 2005. Additional information regarding this funding transaction may be found in our Form 8-K filed with the Securities and Exchange Commission dated May 16, 2005. NOTE H - SUPPLEMENTAL CASH FLOW INFORMATION For the six months ended June 30, 2005 and 2004, non-cash expenses of $235,170 and $400,000 was recorded in administrative and general expense for services rendered by consultants compensated by the issuance of 67,000 and 11 100,000 shares of common stock, respectively. During the six months ended June 30, 2004, a non-cash expense of $20,000 was recorded in administrative and general expense for services rendered by an individual of management compensated by the issuance of 5,000 shares of common stock. For the six months ended June 30, 2005, the Company issued 100,000 shares of common stock and warrants to purchase 120,000 shares of the Company's common stock, at a purchase price of $2.50 per share, valued at approximately $351,000 and $331,147, respectively, to the affiliates of a placement agent in connection with the senior secured convertible notes described above. Additionally, the placement agent received $240,000 in cash. The cumulative value of the stock, warrants and cash totaling approximately $922,147 was recorded as prepaid expense and will be recognized as interest expense over the three-year term of the notes. As of June 30, 2005, $38,423 has been included in interest expense; future expense recognition will be approximately $25,615 per month. On December 23, 2003, the Company entered into a convertible line of credit for up to $1,000,000 with Meridel LTD and Pascoe Holdings LTD, both foreign corporations. The Company may obtain advances as needed to fund operating expenses. On June 30, 2004, the line of credit was amended to increase the limit from $1,000,000 to $2,000,000 with the original due date of the line of credit extended from March 31, 2005 to April 1, 2006. Any portion of the note under the line of credit is convertible at the lenders' sole discretion for common shares of the Company at the rate of $1.00 per share. During the six months ended June 30, 2005 and 2004, the Company borrowed $449,876 and $795,230, respectively. The balance of the note at June 30, 2005 was $844,966, and is included in current debt obligations. The note bears an annual interest rate of 6%. Accrued interest, however, is forgiven upon conversion pursuant to the terms of the line of credit. The Company believes the entire amount of the note will be converted. During the six months June 30, 2005 and 2004, the Company recorded $449,876 and $795,230, respectively, for the beneficial conversion feature associated with the advances made under the line of credit. These amounts are included in interest expense. On May 18, 2004 an Order Confirming the Debtor in Possession's Plan of Reorganization (the Plan) in the bankruptcy case for Interact Devices, Inc. (IDI) was issued. As a result of this action, the Company was issued approximately 50,127,218 shares of the common stock of IDI representing approximately 79% of the outstanding stock of IDI. The Company recorded the following amounts related to the acquisition of research and development in process from IDI from the assumption of liabilities and consolidation of IDI: Receivable from IDI $ (265,008) Liabilities assumed from IDI (994,988) Research and development in process 1,291,573 Trade receivables, net 13,506 Inventory 6,997 Prepaid expenses 2,166 Equipment 46,450 Accounts payable and accrued liabilities (28,696) 12 In accordance with the Plan, in exchange for the common shares of IDI, the Company issued 111,842 shares of common stock of Broadcast International, Inc. valued at approximately $682,222 to the former creditors of IDI. Additional payments totaling approximately $312,766 will be made to the former IDI creditors in equal quarterly installments of approximately $18,000 over of the next four years, which together total the $994,988 liabilities assumed by the Company. The principals of Streamware Solutions AB, a Swedish Corporation, purchased 187,500 shares of common stock below fair market value pursuant to a Stock Purchase and Option Grant Agreement dated February 6, 2004. Streamware was issued an additional 1,000,000 shares of common stock pursuant to a Stock Issuance Stock Transfer and Option Grant Agreement dated effective as of February 26, 2004. The Company also issued to Streamware or its principals 2,812,500 options to purchase common shares of the Company at an exercise price of $4.50 per share, expiring February 6, 2006, associated with the agreements mentioned above. These agreements were entered concurrently with IDI entering into an amended Partner Agreement with Streamware, and all expenses associated with Streamware and the IDI bankruptcy settlement above were recorded as research and development in process, as part of the on-going development costs of the CodecSys technology. The Company recorded the following related to these agreements: Research and development in process expense, stock issued below market 375,000 Research and development in process expense, additional stock issued 6,000,000 Research and development in process expense, fair value of stock options 3,853,019 ___________ Total research and development in process expensed from Streamware $10,288,019 The Company paid no cash for income taxes or interest expense during the three and six months ended June 30, 2005 and 2004, but as of June 30, 2005, $22,500 has been accrued due to be paid in November 2005. NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which amends Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions. The guidance in APB Opinion 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB Opinion 29, however, included certain exceptions to that principle. SFAS 153 amends APB Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. We do not expect that the adoption of SFAS 153 will have a material impact on our consolidated financial position, results of operations or cash flows. 13 In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is effective for small business insurers for interim periods or the fiscal year beginning after December 15, 2005 and, thus, will be effective for us beginning with the first quarter of 2006. Early adoption is encouraged and retroactive application of the provisions of SFAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107"), to provide further guidance regarding the interaction of the provisions of SFAS 123R and certain SEC rules and regulations. We are currently evaluating the impact of SFAS 123R and expect the adoption to have a material impact on our financial position and results of operations. See Stock Compensation in Note D for more information related to the pro forma effects on our reported net income and net income per share of applying the fair value recognition provisions of the previous SFAS 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. In December 2004, the FASB issued FASB Staff Position No. FAS 109-1 ("FAS 109-1"), "Application of FASB Statement No. 109, "Accounting for Income Taxes," to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 ("AJCA"). The AJCA introduces a special 9% tax deduction on qualified production activities. FAS 109-1 clarifies that this tax deduction should be accounted for as a special tax deduction in accordance with Statement 109. The Company does not expect the adoption of these new tax provisions to have a material impact on the Company's consolidated financial position, results of operations, or cash flows. In May 2005, the FASB issued Statement 154, Accounting Changes and Error Corrections, which requires retrospective application (the application of the changed accounting principle to previously issued financial statements as if that principle had always been used) for voluntary changes in accounting principle unless it is impracticable to do so. Previously, the cumulative effect of such changes was recognized in net income of the period of the change. The effective date is for changes made in fiscal year beginning after December 15, 2005. In June 2005, the Emerging Issues Task Force ("EITF") issued three consensuses that are subject to later ratification by the FASB: The first consensus is EITF 04-5 which establishes a framework for evaluating whether a general partner or a group of general partners controls a limited partnership and therefore should consolidate it. Unless the limited partners have "kick-out rights" allowing them to dissolve or liquidate the partnership or otherwise remove the general partner "without cause", or "participating rights" allowing the limited partners to participate in significant decisions made in the ordinary course of the partnership's business, the general partner(s) hold effective control and should consolidate the limited partnership. This would be effective immediately for newly-formed limited partnerships and for existing limited partnership agreements that are modified. For existing limited partnership agreements that are not modified, it would be effective for the beginning of the first reporting period after December 15, 2005. The Company does not expect the adoption of EITF 04-5 to have a material impact on the Company's consolidated financial position, results of operations or cash flows. 14 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Forward-Looking Information This report on Form 10-QSB includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements may relate to such matters as anticipated financial performance, future revenues or earnings, business prospects, projected ventures, new products and services, anticipated market performance and similar matters. When used in this report, the words "may," "will," expect," anticipate," "continue," "estimate," "project," "intend," and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions, and financial trends that may affect the Company's future plans of operations, business strategy, operating results, and financial position. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. To comply with the terms of the safe harbor, we caution readers that a variety of factors could cause our actual results to differ materially from the anticipated results or other matters expressed in forward-looking statements. These risks and uncertainties, many of which are beyond our control, include (i) competitive factors; (ii) general economic and market conditions; (iii) rapid technological change; (iv) dependence on commercialization of our CodecSys technology; (v)dependence on significant customers; (vi) our ability to raise sufficient additional capital; (vii) restrictions under our senior secured convertible notes; (viii) our ability to execute our business model; (ix) our ability to hire and retain qualified software personnel; (x) uncertainty of intellectual property protection; (xi) one-time or non-recurring events; and (xii) other factors identified in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004 under the heading "Risk Factors" in Part I, Item 1. Given these uncertainties, shareholders and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Forward-looking statements speak only as of the date on which such statements are made. The Company disclaims any obligation to update any such factors or to announce publicly the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. The restatement arose from the Company's determination that it had not accounted for the warrants and embedded conversion option of the senior secured convertible notes entered into on May 16, 2005 as liabilities, but had instead improperly accounted for such features using beneficial conversion feature accounting and recorded the conversion option and related warrants as equity. The Company has determined that the fair value of the derivatives should be recorded as a liability, with any changes in fair value of the derivatives between reporting dates as a derivative gain or loss, as appropriate. Results of Operations for the three months ended June 30, 2005 and June 30, 2004 Net Sales The Company generated approximately $999,000 in revenue during the three months ended June 30, 2005. During the same three-month period in 2004, the Company generated revenue of approximately $1,556,000. The decrease in 16 revenue of $557,000 was due primarily to a decrease in sales of equipment to customers of $360,144, a decrease in revenue from video production services of $130,306. These factors are related to the timing of customer contracts and the level of activity required by such contracts. We also recorded a decrease of $60,053 in customer license fees, due to the expiration of a customer contract during the quarter ended June 30, 2005. Cost of Sales Costs of Sales decreased by approximately $279,000 to approximately $1,232,000 for the three months ending June 30, 2005, from $1,511,644 for the three months ending June 30, 2004. The decrease was due primarily to the decreased sales of equipment referenced above, which resulted in a decrease in the cost of equipment sold to the Company's customers of $247,114. The remainder of the decrease was due to a decrease in the cost of delivering the services related to primarily lower employee costs in the quarter ended June 30, 2005 compared to the quarter ended June 30, 2004. There was not a decrease in the cost of equipment relative to the sales price of the equipment. Expenses Operating Expenses for the three months ending June 30, 2005 were $908,581 compared with operating expenses for the three months ending June 30, 2004 of $10,905,535. The decrease of approximately $10,000,000 resulted from the issuance of common stock and grants of options in the three months ended June 30, 2004 and recording the value thereof as a $10,343,945 non cash research and development in process expense related to the Company's CodecSys technology. This expense was not repeated in the current quarter. Administrative and General expenses increased by $382,271 in the current quarter primarily from an increase in legal fees, and from the issuance of stock for investor relations services. The increase in administrative and general expenses was partially offset by a decrease in selling and marketing expenses of $35,280. Other For the three months ended June 30, 2005, the Company recorded an expense of $2,974,027 related to the valuation of the embedded derivates contained in the senior secured convertible notes and the related warrants issued in connection with the May 16, 2005 financing, which constitute derivative securities and for which quarterly gains or losses are recorded based upon the prevailing market price of the underlying common stock. The Company incurred interest expense of $385,885 compared to interest expense for the three months ended June 30, 2004 of $445,657. The Company recorded approximately $238,000 of interest expense related to a convertible note's beneficial conversion feature compared with approximately $448,000 of interest expense in the three months ended June 30, 2004 for the same note. The decrease was partially offset by recording interest expense of $22,500 related to the senior secured convertible notes on the May 16, 2005 financing. Net Loss The Company realized a net loss for the three months ending June 30, 2005 of $4,469,981 compared with a net loss for the three months ended June 30, 2004 of $11,291,838. Adjusting for the $2,974,027 valuation for the embedded derivatives in 2005 and absent the $10,343,945 research and development in process expense for the quarter ended June 30, 2004, the net loss for the three months ended June 30, 2005 increased by approximately $548,000 when compared to the net loss for the three months ended June 30, 2004. This approximate $548,000 increase in net loss excluding the impact of the 2004 research and development in progress expense and the 2005 expense related to the valuation for the derivatives, as mentioned above, is due primarily to the decrease in revenue and the increase in administrative and general expenses as discussed above. 17 Results of Operations for the six months ended June 30, 2005 and June 30, 2004 Sales The Company generated approximately $1,977,147 in revenue during the six months ended June 30, 2005. During the same six-month period in 2004, the Company generated revenue of approximately $2,931,896. The decrease in revenue of $954,749 was primarily a combination of a decrease in sales of equipment to customers of $ 640,015 and a decrease in studio and video production revenue of $249,223. These factors are related to the timing of customer contracts and the level of activity required by such contracts. During the period, network management fees and advertising fees also decreased, but the decrease was partially offset by an increase in satellite fees. Cost of Sales Cost of sales decreased by approximately $534,000 to $2,335,722 for the six months ended June 30, 2005, from $2,869,691 for the six months ended June 30, 2004. The decrease was due primarily to the decreased sales of equipment referenced above, which resulted in a decrease in the cost of equipment sold to the Company's customers of $436,722. In addition the cost of delivering the services decreased by $138,734 due primarily to a decrease of employee salaries and related expenses. There was not a decrease in the cost of equipment relative to the sales price of the equipment. The decrease in costs of revenues was partially offset by an increase of $60,246 in satellite distribution costs and an increase of $18,758 in depreciation and amortization of equipment and leasehold improvements. Expenses Operating Expenses for the six months ending June 30, 2005 were $1,330,516 compared with operating expenses for the six months ending June 30, 2004 of $12,966,668. The decrease of approximately $11,636,000 resulted primarily from one non-cash expense, which included $11,519,377 of research and development in process expenses, related to the Company's CodecSys technology. In addition selling and marketing expenses decreased by approximately $80,000 due primarily to a decrease in trade shows attended and Administrative and General expenses decreased by approximately $36,000. Other For the six months ended June 30, 2005, the Company recorded an expense of $2,974,027 related to the valuation of the embedded derivatives from the conversion feature of the senior secured convertible notes and the warrants of the May 16, 2005 funding. The Company incurred interest expense of $635,799 compared to interest expense for the six months ended June 30, 2004 of $795,306. The primary amount of the decrease resulted from the Company recording interest expense of approximately $488,000 in the six month period ending June 30, 2005 related to the convertible line of credit's beneficial conversion feature compared to approximately $795,000 of interest expense related to the same note in the six months ended June 30, 2004. The decrease was partially offset by the Company recording interest expense of $125,000 for the accretion of the long-term senior secured convertible notes and recording interest expense of $22,500 related to the notes on the May 16, 2005 financing. 18 Net Loss The Company realized a net loss for the six months ending June 30, 2005 of $5,264,028 compared with a net loss for the six months ended June 30, 2004 of $13,682,366. The decrease in the net loss for the six months ended June 30, 2005 of $8,418,338 resulted from a combination of the absence of any Research and Development in Process expenses in the current six-month period which is offset by the additional expense recorded for the derivative valuation of the warrants and conversion feature of the May 2005 financing. If the recorded net loss for the six months ended June 30, 2004 of $13,682,366 were adjusted for the Research and Development in Process expenses of $11,519,377 the adjusted net loss would have been $2,162,989. If the recorded net loss for the six months ended June 30, 2005 of $5,264,028 were adjusted for the expense recorded for the valuation of the embedded derivatives on the May 2005 financing of $2,974,027, the adjusted net loss would have been $2,290,001. The adjusted net loss for the six months ended June 30, 2005 would have increased by approximately $127,012 when compared to adjusted net loss for the six months ended June 30, 2004. The increase in net loss resulted primarily from decreased revenue offset by a decrease in various expenses as explained above. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements. Liquidity and Capital Resources At June 30, 2005, we had cash of $2,267,340, total current assets of $3,715,126, total current liabilities of $7,465,153 and total stockholders' deficit of $3,786,682. Of the approximately $7,500,000 of current liabilities, $5,974,027 relates to the value of the embedded derivatives in the senior secured convertible notes and related warrants and approximately $915,000 relates to the convertible line of credit note. Our audited consolidated financial statements for the year ended December 31, 2004 contain a "going concern" qualification. As discussed in Note J of the Notes to Consolidated Financial Statements, we have incurred losses and have not demonstrated the ability to generate sufficient cash flows from operations to satisfy our liabilities and sustain operations. Because of these conditions, our independent auditors have raised substantial doubt about our ability to continue as a going concern. For the six months ended June 30, 2005, we used $1,385,479 of cash for operating activities compared to cash used for operating activities for the six months ended June 30, 2004 of $954,002. The cash used for operations was provided from proceeds from sales of our common stock and from the financing described below. We have entered into a convertible line of credit dated December 23, 2003, as amended and restated June 30, 2004. The line of credit involves a loan to us, the principal amount of which is convertible into shares of our common stock at $1.00 per share. As of September 30, 2005, a total of $1,644,966 had been advanced to us under the line of credit, of which $800,000 has been previously converted to 800,000 shares of common stock. As of September 30, 2005, the outstanding principal balance of the convertible note was $844,966. The convertible note is due April 1, 2006 and bears interest at an annual rate of 6%. Accrued interest, however, is forgiven upon conversion pursuant to the terms of the line of credit. Any portion of the note is convertible at any time at the lenders' sole discretion. 19 On May 16, 2005, we entered into a securities purchase agreement and completed a financing with a consortium of four institutional funds. In the financing, we received $3,000,000 gross proceeds in cash pursuant to the issuance of senior secured convertible notes to the funds. We are using the proceeds from this financing to support our CodecSys research and development and for general working capital purposes. The senior secured convertible notes are due May 16, 2008 and bear interest at 6% per annum. Interest-only payments are due semi-annually with the first payment of $90,000 due November 16, 2005. The notes are convertible into 1,200,000 shares of our common stock at $2.50 per share, convertible any time during the term of the notes. In connection with the financing, the funds received A Warrants to acquire 600,000 shares of our common stock exercisable at $2.50 per share and B Warrants to acquire 600,000 shares of our common stock at $4.00 per share. The warrants are exercisable any time for a five-year period beginning on the date of grant. The funds also received additional investment rights to make an additional loan of $3,000,000 on the same terms as the senior secured convertible notes and receive additional A Warrants and B Warrants with the same terms as the warrants already received by the funds. The additional investment rights must be exercised within 90 days following the date the Company's registration statement on Form SB-2 filed with the SEC is declared effective. In the event the funds exercise their additional investment rights and exercise all of their warrants, we would receive approximately up to $10,800,000 in additional financing. We paid approximately $345,000 in cash for commissions, finders fees and expenses in securing this financing, $240,000 of which is included in prepaid expenses as of June 30, 2005 and will be amortized over the term of the notes. The $2.50 conversion price of the senior secured convertible notes and the $2.50 and $4.00 exercise price of the A Warrants and the B Warrants, respectively, are subject to adjustment pursuant to standard anti-dilution rights. These adjustment rights include (i) equitable adjustments in the event we effect a stock split, dividend, combination, reclassification or similar transaction; (ii) "weighted average" price protection adjustments in the event we issue new shares of common stock or common stock equivalents in certain transactions at a price less than the then current market price of our common stock; and (iii) "full ratchet" price protection adjustments in the event we issue new shares of common stock or common stock equivalents in certain transactions at a price less than $2.50 per share. The conversion price of the notes and the exercise price of the warrants are also subject to adjustment pursuant to a "reset" provision which is effective as of February 16, 2006. If the moving average closing price of our common stock for the 30 days prior to such date is lower than the applicable conversion price of the notes or the exercise price of the warrants, then the applicable conversion price and/or exercise price will be adjusted to the lower moving average closing price. In no event, however, will the conversion price or exercise price be adjusted below $0.50 per share for the reset provision. The securities purchase agreement contains, among other things, covenants that may restrict our ability to finance future operations, to obtain additional capital, to declare or pay a dividend or to engage in other business activities. A breach of any of these covenants could result in a default under our senior secured convertible notes, in which event holders of the notes could elect to declare all amounts outstanding to be immediately due and payable, which would require us to secure additional debt or equity financing to repay the indebtedness or to seek bankruptcy protection or liquidation. The securities purchase agreement provides that we cannot do any of the following without the prior written consent of the holders of at least 85% of the principal amount of the outstanding senior secured convertible notes: 20 .. issue debt securities or incur, assume, suffer to exist, guarantee or otherwise become or remain, directly or indirectly, liable with respect to certain indebtedness; .. except for those created under the securities purchase agreement, create, incur, assume or suffer to exist, directly or indirectly, any liens, restrictions, security interests, claims, rights of another or other encumbrances on or with respect to any of our assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom; .. complete a private equity or equity-linked financing prior to the first anniversary of the closing date; .. liquidate, wind up or dissolve (or suffer any liquidation or dissolution); .. convey, sell, lease, license, assign, transfer or otherwise dispose of all or any substantial portion of our properties or assets, other than transactions in the ordinary course of business consistent with past practices, and transactions by non-material subsidiaries, if any; .. cause, permit or suffer, directly or indirectly, any change in control transaction as defined in the senior secured convertible notes; .. directly or indirectly enter into or permit to exist any transaction with any of our affiliates or any of our subsidiaries, if any, except for transactions that are in the ordinary course of our business, upon fair and reasonable terms, that are fully approved by our Board of Directors, and that are no less favorable to us than would be obtained in an arm's length transaction with a non-affiliate; .. declare or pay a dividend or return any equity capital to any holder of any of our equity interests or authorize or make any other distribution to any holder of our equity interests in such holder's capacity as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for consideration any of our equity interests outstanding (or any options or warrants issued to acquire any of our equity interests); provided that the foregoing shall not prohibit (i) the performance by us of our obligations under the warrants related to the senior secured convertible notes or the registration rights agreement entered into in connection with the securities purchase agreement, or (ii) us and any of our subsidiaries, if any, from paying dividends in common stock issued by us or such subsidiary that is neither putable by any holder thereof nor redeemable, so long as, in the case of any such common stock dividend made by any such subsidiary, the percentage ownership (direct or indirect) of us in such subsidiary is not reduced as a result thereof; or .. directly or indirectly, lend money or credit (by way of guarantee or otherwise) or make advances to any person, or purchase or acquire any stock, bonds, notes, debentures or other obligations or securities of, or any other interest in, or make any capital contribution to, any other person, or purchase or own a future contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, with very limited exceptions. 21 Under the securities purchase agreement, holders of the senior secured convertible notes were granted preemptive rights, subject to standard exceptions, with respect to new issuances of our common stock and securities convertible into shares of our common stock. The preemptive rights continue until May 16, 2006 and may further restrict our ability to obtain additional capital. During the quarter ended June 30, 2005, we secured a new customer contract which we believe will result in an increase in revenues, although there is no assurance this will happen. We are in the process of training our existing installation technicians on the new equipment and procedures required by the new customer. We anticipate that our negative cash flow will diminish as the new customer makes projects and equipment available and as we are able to perform under the contract. Our monthly operating expenses currently exceed our monthly net sales by approximately $200,000 per month. This amount could increase significantly. Given our current level of CodecSys development activity, we expect our operating expenses will continue to outpace our net sales until we are able to generate additional revenue. Our business model contemplates that sources of additional revenue include (i) sales from our private communication network services, (ii) sales resulting from the new customer contract described above, and (iii) sales related to commercial applications of our CodecSys technology. We anticipate executing on our business model to realize the additional revenue needed to address our liquidity and cash flow position. If we are successful in our execution efforts, we do not anticipate requiring additional capital in the next fiscal year. To the extent we are unable to generate additional revenue from these sources, however, we will need to obtain an infusion of capital in 2006, of which there can be no assurance. Our long-term liquidity is dependent upon execution of our business model and the realization of additional revenue and working capital, as described above, and upon capital needed for continued development of the CodecSys technology. Commercialization and future applications of the CodecSys technology are expected to require additional capital estimated to be approximately $2.0 million annually for the foreseeable future. This estimate will increase or decrease depending on funds available to us. The availability of funding will also determine, in large measure, the timing and introduction of new product applications in the marketplace. Capital required for CodecSys is expected to come from internally generated cash flow from operations or from external financing. To date, we have met our working capital needs through funds received from sales of our common stock, borrowings under a convertible line of credit and the senior secured convertible note financing described above. There can be no assurance that the institutional funds will exercise their additional investment rights or exercise their outstanding warrants, which would provide additional investment capital for us. Until our operations become profitable, we must continue to sell equity or find another source of operating capital. We have entered into an engagement agreement dated October 11, 2005 with First Securities ASA, a leading Norwegian investment banking firm, to provide investment banking services regarding a potential initial public offering of our common stock on the Oslo Stock Exchange. The agreement contemplates, among other things, that we will raise between $10 and $25 million by the end of the first quarter of 2006, subject to development of our revenues and profitability, market conditions in general, acceptance for listing by the Oslo Stock Exchange and the interest for our shares in the capital markets. The agreement is also 22 subject to normal and customary legal and financial due diligence. Except for agreements currently in force with other parties, First Securities will have the exclusive right to provide equity capital and perform certain other investment banking functions with regard to mergers and acquisitions during the term of the agreement and for a six month period following termination of the agreement. The agreement required that we pay First Securities a non-refundable retainer fee of $200,000. Given the numerous conditions and uncertainties related to the proposed initial public offering on the Oslo Stock Exchange, there can be no assurance we will be able to complete such offering. Recent Accounting Pronouncements See Note I above for recent accounting pronouncements. 23 Item 3. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. As required by Rule 13a-15(b) of the Exchange Act, we conducted an evaluation, under the supervision of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2005. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of June 30, 2005 in alerting them in a timely manner to material information required to be included in our reports filed under the Exchange Act. This evaluation identified a material weakness in our disclosure controls and procedures with respect to applying existing accounting pronouncements related to derivative securities and required accounting entries. Management is taking steps to implement appropriate corrective action in this regard. For the six months ended June 30, 2005, management of the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, implemented corrective action with respect to a significant deficiency previously identified regarding beneficial conversion features and associated accounting entries. This action included changes to the way we process and evaluate instruments with a beneficial conversion feature, including development of internal resources required to complete the necessary accounting analysis. Other than the items described above, there has been no change in our internal control over financial reporting during the period ended June 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Important Considerations The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management. 24 Part II - Other Information Item 1. Legal Proceedings None. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. On May 16, 2005, the Company issued 100,000 shares of common stock to two affiliates of the placement agent as commissions for securing the Senior Secured Convertible Notes described above. On June 1, 2005, the Company issued 67,000 shares of common stock for services to two individuals. In each of the forgoing transactions, the Company relied on the exemption from registration under the 1933 Act set forth in Section 4(2) thereof. See Part I "Management's Discussion and Analysis or Plan of Operation-Liquidity and Capital Resources" for a discussion of working capital restrictions and other limitations on the payment of dividends. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to Vote of Security Holders. None. Item 5. Other Information None. Item 6. Exhibits. Exhibit No. 3.1 Amended and Restated Articles of Incorporation of Broadcast International. (Incorporated by reference to Exhibit No. 3.1 of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005 filed with the SEC on August 12, 2005.) 3.2 Bylaws of Broadcast International. (Incorporated by reference to Exhibit No. 3.2 of the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005 filed with the SEC on August 12, 2005.) 4.1 Specimen Stock Certificate of Common Stock of Broadcast International. (Incorporated by reference to Exhibit No. 4.1 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 25 4.2 Form of 6.0% Senior Secured Convertible Note dated May 16, 2005 executed by Broadcast International in favor of Gryphon Master Fund, L.P., GSSF Master Fund, LP, Bushido Capital Master Fund, LP and Gamma Opportunity Capital Partners, LP (the "Institutional Funds"). (Incorporated by reference to Exhibit No. 4.2 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 4.3 Form of A Warrant issued by Broadcast International to each of the Institutional Funds. (Incorporated by reference to Exhibit No. 4.3 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 4.4 Form of B Warrant issued by Broadcast International to each of the Institutional Funds(Incorporated by reference to Exhibit No. 4.4 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 10.1 Employment Agreement of Rodney M. Tiede dated April 28, 2004. (Incorporated by reference to Exhibit No. 10.1 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.) 10.2 Employment Agreement of Randy Turner dated April 28, 2004. (Incorporated by reference to Exhibit No. 10.2 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.) 10.3 Employment Agreement of Reed L. Benson dated April 28, 2004. (Incorporated by reference to Exhibit No. 10.3 of the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004 filed with the SEC on May 12, 2004.) 10.4 Broadcast International Long-Term Incentive Plan. (Incorporated by reference to Exhibit No. 10.4 of the Company's Annual Report of Form 10-KSB for the year ended December 31, 2003 filed with the SEC on March 30, 2004.) 10.5 Securities Purchase Agreement dated May 16, 2005 among Broadcast International and the Institutional Funds. (Incorporated by reference to Exhibit No. 10.5 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 10.6 Security Agreement dated May 16, 2005 between Broadcast International and Gryphon Master Fund, L.P., as collateral agent for the Institutional Funds. (Incorporated by reference to Exhibit No. 10.6 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 26 10.7 Registration Rights Agreement dated May 16, 2005 among Broadcast International and the Institutional Funds. (Incorporated by reference to Exhibit No. 10.7 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 10.8 Form of Additional Investment Rights dated May 16, 2005 issued by Broadcast International to each of the Institutional Funds. (Incorporated by reference to Exhibit No. 10.8 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 10.9 Stock Purchase and Option Grant Agreement dated February 6, 2004 among Broadcast International and certain principals and shareholders of Streamware Solutions AB. (Incorporated by reference to Exhibit No. 10.9 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 10.10 Stock Issuance, Stock Transfer and Option Grant Agreement dated effective as of February 26, 2004 among Broadcast International and certain principals and shareholders of Streamware Solutions AB. (Incorporated by reference to Exhibit No. 10.10 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 10.11 Amended and Restated Convertible Line of Credit dated June 30, 2004 among Broadcast International, Meridel, Ltd. and Pascoe Holdings, Ltd. (Incorporated by reference to Exhibit No. 10.11 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 10.12 Engagement Agreement dated October 11, 2005 between Broadcast International, Inc. and First Securities ASA. (Incorporated by reference to Exhibit No. 10.1 of the Company's Current Report on Form 8-K filed with the SEC on October 17, 2005.). (Incorporated by reference to Exhibit No. 10.12 of the Company's Registration Statement on Form SB-2, pre-effective Amendment No.3 filed with the SEC on October 11, 2005) 31.1 Certification of Chief Executive Officer pursuant to Rule 13a -14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 27 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 28 SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Broadcast International, Inc. Date: November 21, 2005 /s/ Rodney M. Tiede ------------------------------------------- By: Rodney M. Tiede Its: President and Chief Executive Officer (Principal Executive Officer) Date: November 21, 2005 /s/ Randy Turner ------------------------------------------- By: Randy Turner Its: Chief Financial Officer (Principal Financial and Accounting Officer) 29 EX-31.1 2 broad10qsbajuneex311.txt SECTION 302 CERTIFICATION - CEO Exhibit 31.1 Broadcast International, Inc. & Subsidiaries Certification Of Chief Executive Officer PURSUANT TO RULE 13a - 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Rodney M. Tiede, certify that: 1. I have reviewed this quarterly report on Form 10-QSB/A of Broadcast International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: November 21, 2005 /s/ Rodney M. Tiede Rodney M.Tiede Chief Executive Officer EX-31.2 3 broad10qsbajuneex312.txt SECTION 302 CERTIFICATION - CFO Exhibit 31.2 Broadcast International, Inc. & Subsidiaries Certification Of Chief Financial Officer PURSUANT TO RULE 13a - 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Randy Turner, certify that: 1. I have reviewed this quarterly report on Form 10-QSB/A of Broadcast International, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. The small business issuer's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: November 21, 2005 /s/ Randy Turner Randy Turner Chief Financial Officer EX-32.1 4 broad10qsbajuneex321.txt SECTION 906 CERTIFICAITON - CEO Exhibit 32.1 Broadcast International, Inc. & Subsidiaries Certification Of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 In connection with the quarterly report of Broadcast International, Inc. (the "Company") on Form 10-QSB/A for the period ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof, Rodney Tiede, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Form 10-QSB/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Form 10-QSB/A fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 21, 2005 /s/ Rodney M.Tiede - ------------------------- Rodney M.Tiede Chief Executive Officer EX-32.2 5 broad10qsbajuneex322.txt SECTION 906 CERTIFICATION - CFO Exhibit 32.2 Broadcast International, Inc. & Subsidiaries Certification Of Chief Financial Officer Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002 In connection with the quarterly report of Broadcast International, Inc. (the "Company") on Form 10-QSB/A for the period ended June 30, 2005, as filed with the Securities and Exchange Commission on the date hereof, Randy Turner, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Form 10-QSB/A fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Form 10-QSB/A fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 21, 2005 /s/ Randy Turner - -------------------------- Randy Turner Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----