Form 10-QSB

Broadcast International, Inc.

Form 10-Q

Table of Contents

Part I - Financial Information

Page

Item 1. Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4T Controls and Procedures

Part II -Other Information

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 5. Other Information

Item 6. Exhibits

Signatures

Item 1. Financial Information

BROADCAST INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


		December 31,		March 31,
		2007		2008
				(Unaudited)
ASSETS:
Current assets
Cash and cash equivalents	$	16,598,300	$	3,302,725
Available-for-sale securities (note 7)		--		4,075,000
Trade accounts receivable, net		220,834		428,259
Inventory		57,218		51,342
Prepaid expenses		2,449,236		2,275,903

Total current assets		19,325,588		10,133,229

Property and equipment, net		641,314		1,259,561

Other assets
Debt offering Costs		1,367,583		1,250,775
Patents, net		197,346		196,411
Available-for-sale securities (note 7)		--		6,964,813
Deposits and other assets		8,795		9,058

Total other assets		1,573,724		8,421,057

Total assets	$	21,540,626	$	19,813,847

See accompanying notes to consolidated financial statements.

BROADCAST INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)


		December 31,		March 31,
		2007		2008
LIABILITIES:				(Unaudited)

Current liabilities
Accounts payable	$	640,292	$	491,230
Payroll and related expenses		460,236		351,406
Other accrued expenses		55,356		394,198
Unearned revenue		169,359		107,437
Current debt obligations		47,692		--
Derivative valuation		14,267,600		6,958,200

Total current liabilities		15,640,535		8,302,471

Long-term liabilities
Convertible debt (net of $13,068,755 and $11,937,596
discount, respectively)		2,931,245		4,062,404

Total liabilities		18,571,780		12,364,875

Commitments and contingencies (Note 6)

STOCKHOLDERS’ EQUITY:
Preferred stock, no par value, 20,000,000 shares
authorized; none issued		-		-
Common stock, $.05 par value, 180,000,000 shares
authorized; 37,775,034 and 38,501,296 shares issued as
of December 31, 2007 and March 31, 2008, respectively		1,888,752		1,925,065
Additional paid-in capital		65,289,354		67,920,900
Unexercised stock options and warrants		3,789,095		3,977,566
Accumulated other comprehensive loss		-		(560,187)
Subscriptions receivable		(25,000)		-
Accumulated deficit		(67,973,355)		(65,814,372)

Total stockholders’ equity		2,968,846		7,448,972

Total liabilities and stockholders’ equity	$	21,540,626	$	19,813,847

See accompanying notes to consolidated financial statements.

BROADCAST INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


		For the three months ended March 31,
		2007		2008


Net sales	$	1,599,066	$	1,187,392

Cost of sales		1,594,775		1,136,446

Gross profit		4,291		50,946

Operating expenses:
Administrative and general		1,574,684		1,534,181
Selling and marketing		142,621		246,192
Research and development		185,063		776,633

Total operating expenses		1,902,368		2,557,006

Total operating loss		(1,898,077)		(2,506,060)

Other income (expense):
Interest income		9,035		162,619
Interest expense		(773,831)		(1,501,792)
Derivative valuation gain (loss)		(1,654,390)		6,009,063
Other income (expense)		2,666		(4,847)

Total other income (expense)		(2,416,520)		4,665,043

Income (loss) before income taxes		(4,314,597)		2,158,983

Provision for income taxes		--		--

Net Income (loss)	$	(4,314,597)	$	2,158,983

Net income (loss) per share – basic	$	(0.15)	$	0.06

Net income (loss) per share – diluted	$	(0.15)	$	0.05

Weighted average shares – basic		27,854,000		38,139,100

Weighted average shares – diluted		27,854,000		43,762,197

See accompanying notes to consolidated financial statements.

BROADCAST INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Three Months Ended
		March 31,
		2007		2008
Cash flows from operating activities:

Net income (loss)	$	(4,314,597)	$	2,158,983

Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		60,603		83,441
Common stock issued for services		--		54,600
Common stock issued for in process research and development		--		19,667
Accretion of discount on convertible notes payable		291,669		1,131,916
Unexercised options and warrant expense		611,993		188,471
Gain on sale of assets		(5,100)		--
Derivative liability valuation		1,654,390		(6,009,063)
Extinguishment of debt		281,249		6,056
Allowance for doubtful accounts		19,150		56,232
Changes in assets and liabilities:
Accounts receivable		611,179		(263,657)
Inventories		11,185		5,876
Debt offering costs		147,951		116,808
Prepaid and other assets		836,617		661,070
Accounts payable and accrued expenses		(275,054)		(26,958)
Deferred revenues		(465,622)		(61,922)

Net cash used in operating activities		(534,387)		(1,878,480)

Cash flows from investing activities:

Purchase of equipment		(18,867)		(592,845)
Purchase of available-for-sale securities		--		(11,600,000)
Proceeds from sale of assets		5,100		--

Net cash used in investing activities		(13,767)		(12,192,845)

Cash flows from financing activities:

Proceeds from the exercise of warrants		--		750,000
Principal payments on debt		(536,460)		--
Proceeds from subscription receivable		--		25,000
Proceeds from the exercise of options		--		750
Proceeds for the sale of stock		348,020		--
Loan proceeds		249,974		--

Net cash provided by financing activities		61,534		775,750

Net decrease in cash and cash equivalents		(486,620)		(13,295,575)

Cash and cash equivalents, beginning of period		807,741		16,598,300

Cash and cash equivalents, end of period	$	321,121	$	3,302,725

See accompanying notes to consolidated financial statements.

BROADCAST INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 2008

NOTE 1 - BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Broadcast International, Inc. (“we” or the “Company”) contain the adjustments, all of which are of a normal recurring nature, necessary to present fairly our financial position at December 31, 2007 and March 31, 2008 and the results of operations for the three months ended March 31, 2007 and 2008, respectively, with the cash flows for each of the three month periods ended March 31, 2007 and 2008, in conformity with U.S. generally accepted accounting principles.

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2007. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

NOTE 2 - RECLASSIFICATIONS

Certain 2007 financial statement amounts have been reclassified to conform to 2008 presentations.

NOTE 3 - 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, plus the effect of assuming conversion of the convertible debt. The computation of diluted earnings per share does not assume conversion or exercise of securities that would have an anti-dilutive effect on earnings.

Outstanding stock options and warrants were not included in the calculation of diluted earnings per share for the period ended March 31, 2007 as their inclusion would be anti-dilutive, thereby reducing the net loss per common share.

The following table sets forth the computation of basic and diluted net income per share for March 31, 2007 and 2008:


		Three Months Ended March 31,
		2007	2008

Net income		$ (4,314,597)	$ 2,158,983

Basic weighted average shares outstanding		27,854,000	38,139,100
Effect of dilutive securities:
	Stock options and warrants	-	5,623,097

Dilutive weighted average shares outstanding		27,854,000	43,762,197

Net income per share
	Basic	$ (0.15)	$ 0.06
	Diluted	$ (0.15)	$ 0.05

Options and warrants to purchase 3,080,600 and 15,014,643 shares of common stock at prices ranging from $.02 to $45.90 per share were outstanding at March 31, 2008 and 2007, respectively, but were excluded from the calculation of diluted earnings per share because the effect of the stock options and warrants was anti-dilutive. Furthermore, the Company had convertible debt that was convertible into 3,418,961 shares of common stock at March 31, 2008, that was excluded from the calculation of diluted earnings per share because the effect was anti-dilutive.

NOTE 4 - STOCK COMPENSATION

Beginning on January 1, 2006, we began accounting for stock-based compensation under the provisions of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (FAS 123R), which requires the recognition of the fair value of stock-based compensation. We have used the modified prospective application. Under the fair value recognition provisions for FAS 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. We have used the Black-Scholes valuation model to estimate fair value of our stock-based awards, which requires various judgmental assumptions including estimated stock price volatility, forfeiture rates, and expected life. Our computation of expected volatility is based on a combination of historical and market-based implied volatility.

We calculated the fair market value of each option and warrant awarded on the date of grant using the Black-Scholes option-pricing model. The following assumptions were used for the grants awarded for the three months ended March 31, 2008.


Risk-free interest rate	3.45% - 3.70%
Expected lives in years	10.0
Dividend yield	0
Expected volatility	76.73% - 77.43%

Net income (loss) for the three months ended March 31, 2008 and 2007 includes $188,471 and $611,993, respectively, of non-cash stock-based compensation expense. Options issued to directors vest immediately and all other options and warrants are subject to applicable vesting schedules. Expense is recognized proportionally as each grant vests.

Included in the $188,471 for the three months March 31, 2008 is (i) $22,145 for the vested portion of 286,500 options granted to eight employees, (ii) $182,215 resulting from the vesting of unexpired options and warrants issued prior to January 1, 2008, (iii) ($15,889) credit for recovery of previously recorded expense of vested options forfeited during the period.

Included in the $611,993 for the three months March 31, 2007 is $405,000 resulting from 500,000 options granted to two directors, $125,941 resulting from the vesting of unexpired options issued prior to January 1, 2007, $57,330 resulting from 1,300,000 warrants issued to 5 consultants, $13,362 resulting from the issuance of 366,500 options issued to non-executive management employees and $10,360 for repriced options previously granted to executive management. Warrants to acquire 231,999 shares of our common stock were also granted to certain equity investors.

The impact on our results of operations for recording stock-based compensation under FAS 123R for the three months ended March 31, 2008 and 2007 are as follows:


	2008	2007

General and administration	$ 103,581	$ 599,188
Research and development in process	84,890	52,805

Total	$ 188,471	$ 611,993

Due to unexercised options outstanding at March 31, 2008, we will recognize a total of $1,547,656 of compensation expense over the next four years for employees and consultants as a result of the adoption of FAS 123R based upon option and warrant award vesting parameters as shown below:



2008	$ 672,200
2009	473,583
2010	360,942
2011	40,931

Total	$ 1,547,656

The following unaudited tables summarize option and warrant activity during the three months ended March 31, 2008.


	Options and Warrants Outstanding	Options or Warrants Price Per Share

Outstanding at December 31, 2007	16,034,019	$ 0.02	–	$ 45.90
Options granted	286,500	2.60	–	3.45
Warrants issued	--	--	–	--
Expired	--	--	–	--
Forfeited	(37,796)	0.55	–	4.00
Exercised	(502,258)	0.33	–	1.50

Outstanding at March 31, 2008	15,780,465	$ 0.02	–	$ 45.90

The following table summarizes information about stock options and warrants outstanding at March 31, 2008.


		Outstanding				Exercisable
			Weighted Average Remaining		Weighted Average			Weighted Average
	Range of Exercise Prices	Number Outstanding	Contractual Life (years)		Exercise Price	Number Exercisable		Exercise Price
$	0.02-0.04	1,264,495	2.07	$	0.03	1,264,495	$	0.03
	0.33-0.95	1,676,822	6.58		0.72	1,510,155		0.70
	1.06-6.25	12,835,548	3.37		2.52	12,238,714		2.51
	9.50-11.50	2,000	3.27		10.65	2,000		10.65
	36.25-45.90	1,600	2.42		41.08	1,600		41.08
$	0.02-45.90	15,780,465	3.61	$	2.14	15,016,965	$	2.12

NOTE 5- SIGNIFICANT ACCOUNTING POLICIES

Management Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

We consider all cash on hand and in banks, and highly liquid investments with maturities of three months or less, to be cash equivalents. At March 31, 2008 and 2007, we had bank balances in the excess of amounts insured by the Federal Deposit Insurance Corporation. We have not experienced any losses in such accounts, and believe we are not exposed to any significant credit risk on cash and cash equivalents.

Current financial market conditions have had the effect of restricting liquidity of cash management investments and have increased the risk of even the most liquid investments and the viability of some financial institutions. We do not believe, however, that these conditions will materially affect our business or our ability to meet our obligations or pursue our business plans.

Account Receivables

Included in our $428,259 and$220,834 net accounts receivable for the three months ending March 31, 2008 and year ending December 31, 2007, respectively, were, (i) $96,214 and $35,106 of unbilled trade receivables and (ii) $19 and $5,421 for employee travel advances and other receivables, respectively. Trade account receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received.

A trade receivable is considered to be past due if any portion of the receivable balance is outstanding for more than 90 days. After the receivable becomes past due, it is on non-accrual status and accrual of interest is suspended.

Inventories

Inventories consisting of electrical and computer parts are stated at the lower of cost or market determined using the first-in, first-out method.

Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the property, generally from three to five years. Repairs and maintenance costs are expensed as incurred except when such repairs significantly add to the useful life or productive capacity of the asset, in which case the repairs are capitalized.

Patents

Patents represent initial legal costs incurred to apply for United States and international patents on the CodecSys technology, and are amortized on a straight-line basis over their useful life of approximately 20 years. We have filed several patents in the United States and foreign countries. As of March 31, 2008, the United States Patent and Trademark Office had approved 2 patents. Additionally, five foreign countries had approved patent rights. While we are unsure whether we can develop the technology in order to obtain the full benefits, the patents themselves hold value and could be sold to companies with more resources to complete the development. On-going legal expenses incurred for patent follow-up have been expensed from July 2005 forward.

Amortization expense recognized on all patents totaled $935 and $737 for the three months ended March 31, 2008 and 2007, respectively.

Estimated amortization expense, if all patents were issued at the beginning of 2008, for each of the next five years is as follows:


Year ending December 31:
2008	$10,652
2009	10,652
2010	10,652
2011	10,652
2012	10,652

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.

Income Taxes

We account for income taxes in accordance with the asset and liability method of accounting for income taxes prescribed by Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to the taxable income in the years in which those temporary differences are expected to be recovered or settled.

Revenue Recognition

We recognize revenue when evidence exists that there is an arrangement between us and our customers, delivery of equipment sold or service has occurred, the selling price to our customers is fixed and determinable with required documentation, and collectability is reasonably assured. We recognize as deferred revenue, payments made in advance by customers for services not yet provided.

When we enter into a multi-year contract with a customer to provide installation, network management, satellite transponder and help desk, or combination of these services, we recognize this revenue as services are performed and as equipment is sold. 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. As these on-site visits are performed the associated revenue and cost are recognized in the period the work is completed. If we install, for an additional fee, new or replacement equipment to an immaterial number of new customer locations, and the equipment immediately becomes the property of the customer, the associated revenue and cost are recorded in the period in which the work is completed.

Research and Development

Research and development costs are expensed when incurred. We expensed $776,633, and $185,063 of research and development costs for the three months ended March 31, 2008 and 2007, respectively.

Concentration of Credit Risk

Financial instruments, which potentially subject us to concentration of credit risk, consist primarily of trade accounts receivable. In the normal course of business, we provide credit terms to our customers. Accordingly, we perform ongoing credit evaluations of our customer



Utah		87-0395567
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)


Class	Outstanding as of May 5, 2008
Common Stock, $.05 par value	38,565,696 shares