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`

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-QSB (Mark One)þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
March 31, 2005o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor the transition period from  to
 Commission File Number: 0-29020 ViewCast.com, Inc.   Delaware
    
    75-2528700(State or other Jurisdiction of
    
    (I.R.S. Employer IncorporationIncorporation or Organization)
    
    Identification No.)
 17300 Dallas Parkway, Suite 2000, Dallas, TX 75248   972/488-7200   Check whether the issuer (1) filed all documents required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents required to be filed by Section 12, 13 or 15(d) of
the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes o
No o APPLICABLE ONLY TO CORPORATE ISSUERS As of May 16, 2005, 25,582,903 shares of the Registrants common stock were outstanding. Transitional Small Business Disclosure Format (check one): Yes o No þ




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ViewCast.com, Inc. and Subsidiaries
Index to Form 10-QSB PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at December 31, 2004 and March 31, 2005 (Unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2004 and 2005 (Unaudited)
    
    
    4Condensed Consolidated Statement of Stockholders Deficit for the Three Months ended March 31, 2005 (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2004 and 2005 (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis or Plan of Operation
    
    
    17Item 3. Controls and Procedures
    
    
    24PART II. OTHER INFORMATION
    
    
    25SIGNATURES
    
    
    26Rule 13a-14(a)/15d-14(a) CertificationsSection 1350 Certifications
  2




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VIEWCAST.COM, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    March 31,2004
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    372,175
    
    
    $
    264,943Accounts receivable, less allowance for doubtful accounts
of $28,751 and $34,822 at December 31, 2004 and
March 31, 2005 respectively
    
    
    3,520,620
    
    
    
    3,697,698Inventories
    
    
    1,620,278
    
    
    
    1,723,056Prepaid expenses
    
    
    134,261
    
    
    
    276,738Total current assets
    
    
    5,647,334
    
    
    
    5,962,435Property and equipment, net
    
    
    1,298,715
    
    
    
    1,230,532Goodwill
    
    
    1,041,430
    
    
    
    1,041,430Customer contracts, net
    
    
    241,389
    
    
    
    165,151Software development costs, net
    
    
    184,396
    
    
    
    169,030Deposits
    
    
    109,430
    
    
    
    105,030Total assets
    
    $
    8,522,694
    
    
    $
    8,673,608LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    1,153,150
    
    
    $
    1,287,903Accrued expenses
    
    
    1,389,159
    
    
    
    1,677,342Deferred revenue
    
    
    672,127
    
    
    
    1,312,163Stockholder line of credit
    
    
    2,900,000
    
    
    
    3,000,000Short-term debt, other
    
    
    313,170
    
    
    
    2,977Current maturities of long-term debt
    
    
    127,175
    
    
    
    185,153Series D redeemable convertible preferred stock
    
    
    1,506,700
    
    
    
    45,320Total current liabilities
    
    
    8,061,481
    
    
    
    7,510,858Long-term debt less current maturities
    
    
    22,808
    
    
    
    19,540Stockholder note payable
    
    
    6,794,422
    
    
    
    6,736,843Stockholder accrued interest
    
    
    1,626,754
    
    
    
    1,657,076Commitments and contingencies
    
    
    
    
    
    
    Stockholders deficit:Convertible preferred stock, $0.0001 par value:Authorized shares - 5,000,000Series B  issued and outstanding shares - 800,000
    
    
    80
    
    
    
    80Series C  issued and outstanding shares - 200,000
    
    
    20
    
    
    
    20Common stock, $ .0001 par value:Authorized shares - 100,000,000Issued shares -20,950,118 and 23,104,942 at December 31, 2003 and 2004,
respectively
    
    
    2,310
    
    
    
    2,576Additional paid-in capital
    
    
    57,715,654
    
    
    
    59,647,954Accumulated deficit
    
    
    (65,688,929
    )
    
    
    (66,889,433
    )Treasury stock,
261,497 shares at cost
    
    
    (11,906
    )
    
    
    (11,906
    )Total stockholders deficit
    
    
    (7,982,771
    )
    
    
    (7,250,709
    )Total liabilities and stockholders deficit
    
    $
    8,522,694
    
    
    $
    8,673,608
 The accompanying notes are an integral part of these condensed consolidated statements. 3




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VIEWCAST.COM, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 For the three months endedMarch 31,2004
    
    
    2005Net sales
    
    $
    4,979,020
    
    
    $
    5,456,176Cost of sales (includes depreciation
of $89,342
and $103,472 for the three months ended
March 31, 2004 and 2005, respectively)
    
    
    3,009,360
    
    
    
    3,290,798Gross profit
    
    
    1,969,660
    
    
    
    2,165,378Operating expenses:Selling, general and administrative
    
    
    1,682,910
    
    
    
    1,967,132Research and development
    
    
    425,133
    
    
    
    614,767Depreciation and amortization
    
    
    102,920
    
    
    
    98,715Total operating expenses
    
    
    2,210,963
    
    
    
    2,680,614Operating loss
    
    
    (241,303
    )
    
    
    (515,236
    )Other expense:Interest expense
    
    
    (219,920
    )
    
    
    (213,065
    )Debt conversion expense
    
    
    
    
    
    
    (471,186
    )Other
    
    
    (1,266
    )
    
    
    (1,017
    )Total other expense
    
    
    (221,186
    )
    
    
    (685,268
    )Net Loss before income taxes
    
    
    (462,489
    )
    
    
    (1,200,504
    )Income tax expense
    
    
    
    
    
    
    NET LOSS
    
    $
    (462,489
    )
    
    $
    (1,200,504
    )Preferred dividends
    
    
    (230,508
    )
    
    
    (202,005
    )Net loss applicable to common stockholders
    
    $
    (692,997
    )
    
    $
    (1,402,509
    )Net loss per share  basic and diluted
    
    $
    (0.03
    )
    
    $
    (0.06
    )Weighted average number of common shares
outstanding  basic and diluted
    
    
    20,688,621
    
    
    
    22,901,207
 The accompanying notes are an integral part of these condensed consolidated statements. 4




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VIEWCAST.COM, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
 FOR THE THREE MONTHS ENDED MARCH 31, 2005
 (UNAUDITED)
 Series B
    
    
    Series CConvertible
    
    
    Convertible
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    TotalPreferred Stock
    
    
    Preferred Stock
    
    
    Common Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Par Value
    
    
    Shares
    
    
    Par Value
    
    
    Shares
    
    
    Par Value
    
    
    Capital
    
    
    Deficit
    
    
    Stock
    
    
    DeficitBalance, January 1, 2005
    
    
    800,000
    
    
    $
    80
    
    
    
    200,000
    
    
    $
    20
    
    
    
    23,104,942
    
    
    $
    2,310
    
    
    $
    57,715,654
    
    
    $
    (65,688,929
    )
    
    $
    (11,906
    )
    
    $
    (7,982,771
    )Sale of common stock, employee
stock purchase plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Preferred D
shares to common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,657,058
    
    
    
    266
    
    
    
    1,932,300
    
    
    
    
    
    
    
    
    
    
    
    1,932,566Net Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,200,504
    )
    
    
    
    
    
    
    (1,200,504
    )Balance, March 31, 2005
    
    
    800,000
    
    
    
    80
    
    
    
    200,000
    
    
    
    20
    
    
    
    25,762,000
    
    
    
    2,576
    
    
    
    59,647,954
    
    
    
    (66,889,433
    )
    
    
    (11,906
    )
    
    
    (7,250,709
    )
 The accompanying notes are an integral part of this condensed consolidated statement. 5




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VIEWCAST.COM, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 For the three months ended2004
    
    
    2005Operating activities:Net loss
    
    $
    (462,489
    )
    
    $
    (1,200,504
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation of fixed assets
    
    
    153,512
    
    
    
    125,516Amortization of software development costs
    
    
    
    
    
    
    15,366Amortization of customer contracts
    
    
    38,750
    
    
    
    76,238Non-cash charges to interest expense
    
    
    43,642
    
    
    
    30,322Non-cash debt conversion expense
    
    
    
    
    
    
    471,186Loss on disposition of property and equipment
    
    
    1,329
    
    
    
    Non-cash consulting fees exchanged for options, warrants
and common stock
    
    
    47
    
    
    
    Changes in operating assets and liabilitiesAccounts receivable
    
    
    619,563
    
    
    
    (177,078
    )Inventories
    
    
    (76,764
    )
    
    
    (102,778
    )Prepaid expenses
    
    
    (38,955
    )
    
    
    (142,477
    )Deferred charges
    
    
    (55,000
    )
    
    
    Deposits
    
    
    4,328
    
    
    
    4,400Accounts payable
    
    
    (136,014
    )
    
    
    134,753Accrued expenses and stockholder accrued interest
    
    
    372,060
    
    
    
    288,183Deferred revenue
    
    
    176,355
    
    
    
    640,036Net cash provided by operating activities
    
    
    640,364
    
    
    
    163,163Investing activities:Capitalized software development costs
    
    
    (49,837
    )
    
    
    Purchase of property and equipment
    
    
    (119,487
    )
    
    
    (57,333
    )Proceeds from disposition of property and equipment
    
    
    1,074
    
    
    
    Net cash used in investing activities
    
    
    (168,250
    )
    
    
    (57,333
    )Financing activities:Net proceeds from stockholder line of credit
and advances
    
    
    425,000
    
    
    
    100,000Net repayments short-term debt, other
    
    
    (462,912
    )
    
    
    (313,062
    )Repayment of long-term debt
    
    
    (1,435
    )
    
    
    Net cash used in financing activities
    
    
    (39,347
    )
    
    
    (213,062
    )Net increase (decrease) in cash and cash equivalents
    
    
    432,767
    
    
    
    (107,232
    )Cash and cash equivalents, beginning of period
    
    
    299,764
    
    
    
    372,175Cash and cash equivalents, end of period
    
    $
    732,531
    
    
    $
    264,943Supplemental cash flow information:Cash paid for interest
    
    $
    14,346
    
    
    $
    13,321Supplemental non-cash flow operting activities:Purchase of property and equipment with long-term debt
    
    $
    21,279
    
    
    $
    Conversion of Series D redeemable convertible preferred
stock to common stock
    
    $
    
    
    
    $
    1,461,380
 The accompanying notes are an integral part of this condensed consolidated statement. 6




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ViewCast.com, Inc. and Subsidiaries 
 Notes to the Condensed Consolidated Financial Statements
 1. Basis of Presentation The accompanying unaudited interim consolidated financial statements include the accounts of
ViewCast.com, Inc. and its wholly-owned subsidiaries, Delta Computec Inc. (DCi), Osprey
Technologies, Inc., VideoWare, Inc. and ViewCast Online Solutions, Inc. (collectively, the Company
or ViewCast). All material inter-company accounts and transactions have been eliminated in
consolidation. The financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals) considered necessary for
a fair presentation have been included. Certain prior period balances have been reclassified to
conform to current period presentation. Operating results for the three months ended March 31, 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
included in the Companys Annual Report on Form 10-KSB/A for the year ended December 31, 2004 filed
with the Securities and Exchange Commission. The Company utilizes significant capital to design, develop and commercialize its products and
intends to fund its 2005 operating activities and sales growth by utilizing cash contributed from
operations and its available working capital lines of credit to the extent possible. The Company
anticipates it will require additional working capital during 2005 to support the expansion of
sales channels and market distribution, to develop and introduce new products and services, to
enhance existing product offerings, to address unanticipated competitive threats or technical
problems, to transition adverse economic conditions and for potential acquisition transactions.
Although the Company has no firm arrangements with respect to additional financing, it is currently
considering proposals by potential investors relating to the issuance of equity securities in
exchange for a cash investment in the Company. There can be no assurance that additional financing
will be available to the Company on acceptable terms, or at all. Additional equity financing may
involve substantial dilution to our then existing stockholders. The Company intends to actively
pursue other such strategic merger and acquisition activities to the extent possible. In the event
the Company is unable to raise additional capital or execute other alternatives, we may be required
to sell segments of the business, or substantially reduce or curtail our activities. Such actions
could result in charges that could be material to the ViewCasts results of operations or financial
position. 2. Accounts Receivable The Companys accounts receivable are primarily due from resellers and distributors of our
video communications products and services and from customers in the healthcare, pharmaceutical,
financial services and educational industries to whom we provide information technology services
and products. Credit is extended based on evaluation of each customers financial condition and,
generally collateral is not required except for certain international customers. Accounts
receivable are generally due within 30 days and are stated net of an allowance for doubtful
accounts. Accounts, which are outstanding longer than contractual payment terms, are considered
past due. The Company records an allowance on a specific basis by considering a number of factors,
including the length of time trade accounts are past due, the Companys previous loss history, the
credit-worthiness of individual customers, economic conditions affecting specific customer
industries and economic conditions in general. The Company writes-off accounts receivable when
they become uncollectible and payments
subsequently received on such receivables are credited against write-offs in the period the
payment is received. Changes in the Companys allowance for doubtful accounts for the three months ended March 31,
2004 and 2005 are as follows: Three Months Ended March 31,2004
    
    
    2005(Unaudited)
    
    
    (Unaudited)Beginning balance
    
    $
    86,246
    
    
    $
    28,751Bad debt expense
    
    
    17,019
    
    
    
    16,792Uncollectible accounts written
off, net of recoveries
    
    
    618
    
    
    
    (10,721
    )Ending Balance
    
    $
    103,883
    
    
    $
    34,822
 7




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued 3. Inventories Inventories consist of the following: December 31, 2004
    
    
    March 31,2005(Unaudited)Purchased materials
    
    $
    491,922
    
    
    $
    564,188Finished goods
    
    
    1,128,356
    
    
    
    1,158,868$
    1,620,278
    
    
    $
    1,723,056
 4. Accrued Expenses Accrued expenses consist of the following: December 31,
    
    
    March 31,2004
    
    
    2005(Unaudited)Stockholder accrued interest
    
    $
    400,040
    
    
    $
    573,588Accrued compensation
    
    
    524,561
    
    
    
    619,730Accrued legal & professional
    
    
    47,024
    
    
    
    Accrued warranty
    
    
    57,744
    
    
    
    59,416Accrued rent
    
    
    20,833
    
    
    
    16,316Accrued inventory purchases
    
    
    45,960
    
    
    
    107,888Customer deposits
    
    
    32,376
    
    
    
    Other
    
    
    260,621
    
    
    
    300,404$
    1,389,159
    
    
    $
    1,677,342
 5. Warranty Reserves Reserves are provided for the estimated warranty costs when revenue is recognized. The costs
of warranty obligations are estimated based on warranty policy or applicable contractual warranty,
historical experience of known product failure rates and use of materials and service delivery
charges incurred in correcting product failures. Specific warranty accruals may be made if
unforeseen technical problems arise. If actual experience, relative to these factors, adversely
differs from these estimates, additional warranty expense may be required. The following table below shows the roll forward of accrued warranty expense for the three
months ended March 31, 2004 and 2005: For the three months endedMarch 31,2004
    
    
    2005(Unaudited)
    
    
    (Unaudited)Beginning balance
    
    $
    60,260
    
    
    $
    57,744Charged to expense
    
    
    12,995
    
    
    
    10,350Usage
    
    
    (14,836
    )
    
    
    (8,678
    )Ending Balance
    
    $
    58,419
    
    
    $
    59,416
 8




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued 6. Property and Equipment Property and equipment, at cost, consists of the following: EstimatedUseful Life
    
    
    December 31,
    
    
    March 31,(Years)
    
    
    2004
    
    
    2005(Unaudited)Computer equipment
    
    
    3 to 7
    
    
    $
    2,025,628
    
    
    $
    2,052,677Service assets
    
    
    3
    
    
    
    901,299
    
    
    
    924,325Software
    
    
    3 to 5
    
    
    
    650,012
    
    
    
    650,012Leasehold improvements
    
    
    1 to 5
    
    
    
    91,295
    
    
    
    91,295Office furniture and equipment
    
    
    5 to 7
    
    
    
    691,247
    
    
    
    698,5064,359,481
    
    
    
    4,416,815Less accumulated depreciation
and amortization
    
    
    
    
    
    
    (3,060,766
    )
    
    
    (3,186,283
    )$
    1,298,715
    
    
    $
    1,230,532
 7. Short-term Debt Stockholder Line of Credit Since October 1998, the Company has maintained a working capital line of credit facility with
an entity controlled by one of its principal stockholders, Mr. H.T. Ardinger, who also currently
serves as Chairman of the Board of Directors of the Company. Prior to October 15, 2003,
availability of funds under this facility was subject to certain borrowing base limitations based
principally on qualifying accounts receivable and inventory with interest payable on demand at 12%
and secured by the assets of ViewCast.com, Inc. In October 2003, ViewCast.com, Inc., Osprey
Technologies, Inc. and VideoWare, Inc. (jointly and severally, the Borrower) amended the terms
and conditions of this credit note and security agreement with the Ardinger Family Partnership,
LTD. (Lender). As of the date of the agreement, the outstanding principal balance of the
indebtedness under the original loan agreement was $7,509,582 and accrued and unpaid interest
thereon was $1,243,665. Additionally, in October 2003 the Company had outstanding $500,000 in
advances from Lender for the purchase of DCi in October 2002. Effective October 15, 2003, the
terms and conditions of the note agreement were amended to establish a long-term payout for
$6,909,582 principal amount of the note and accrued interest of $1,243,665. Additionally, a new
$2.0 million short-term line of credit facility was established with an initial principal amount
$1.1 million consisting of $600,000 principal amount of the original note and $500,000 of
stockholder advances. The amended note agreement reduces the per annum interest rate on
stockholder notes from 12% to the lesser of prime plus 3.0% or 9.5%, eliminates the borrowing base
requirements based on outstanding accounts receivable and inventory and is secured by all assets of
the Borrower. Effective April 30, 2004, the Company amended the terms and conditions of the credit facility
to increase the credit line of the revolving credit note to $2.25 million and extended the
commencement date for the scheduled payments of the term note and accrued interest from April 30,
2004 to August 31, 2004. Effective August 13, 2004, the Company amended the terms and conditions
of the credit facility to increase the credit line of the revolving credit note to $3.0 million and
extended the commencement date for the scheduled payments of the term note and accrued interest
from August 31, 2004 to December 31, 2004. Effective March 22, 2005, the Company amended the terms
and conditions of the credit facility to increase the credit line of the revolving credit note to
$3.5 million and extended the commencement date of scheduled payments of the term note and accrued
interest from December 31, 2004 to July 31, 2005. During the three months ended March 31, 2005, net borrowings under the new stockholder line of
credit note were $100,000 resulting in a note principal balance of $3,000,000. At March 31, 2005,
the Company had availability under the stockholder line of credit of $500,000. At March 31, 2005
the Company had
outstanding $234,407 in stockholder accrued interest attributable to the stockholder line of
credit. 9




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued Keltic Asset Based Revolving Credit Facility The Company also maintains a $1.5 million asset based revolving credit facility with Keltic
Financial Partners, LP (Keltic) for working capital support of DCi operations. Draws on the
revolving credit facility are based on qualifying DCi accounts receivable. The loan balance is
reduced as cash collections are received directly by Keltic. The Company has entered into a
Guaranty of Payment and a Performance and Subordination Agreement with Keltic relating to this
facility. During the three months ended March 31, 2005, cash collections in excess of draws
reduced the Keltic loan balance to $2,977 at March 31, 2005. DCi had availability of $1,097,126
under the revolving credit facility as of March 31, 2005. On December 10, 2004, the Keltic credit facility was amended to extend the maturity date of
the note to January 10, 2005 and to extend the date related to penalties for early prepayment or
termination of the loan from December 11, 2004 to January 10, 2005. On January 10, 2005, the
Keltic credit facility was amended to extend the maturity date of the note to February 15, 2005 and
to extend the date related to penalties for early prepayment or termination of the loan from
January 11, 2005 to February 15, 2005. On February 15, 2005, the Keltic credit facility was amended
to extend the maturity date of the note to April 15, 2005 and to extend the date related to
penalties for early prepayment or termination of the loan from February 15, 2005 to April 15, 2005.
On April 15, 2005, the Keltic credit facility was amended to extend the maturity date of the note
to July 15, 2005 and to extend the date related to penalties for early prepayment or termination of
the loan from April 15, 2005 to July 15, 2005. In April 2005, Keltic was paid $3,500 in
modification fees pertaining to the April note amendment. Short-term debt consists of the following: December 31, 2004
    
    
    March 31, 2005(Unaudited)$3.5 million line of
credit note payable to
principal stockholder of
the Company, secured by
all assets of Borrower,
with interest due on
demand at the lesser of
prime plus 3.0% or 9.5%
fixed rate, due July 2005.
    
    $
    2,900,000
    
    
    $
    3,000,000$1.5 million revolving
based credit facility
payable to a commercial
finance company,
collateralized by all DCi
assets and guaranteed by
the Company, with interest
payable at the higher of
prime plus 2.5% or 6.5%
fixed rate, due July 2005.
    
    
    313,170
    
    
    
    2,977$
    3,213,170
    
    
    $
    3,002,977
 8. Long -Term Debt Stockholder Term Note In October 2003, the Company amended the terms and conditions of its then outstanding
stockholder line of credit to establish a long-term payout for $6,909,582 principal amount of the
note and the amended note agreement significantly reduced the per annum interest rate from the
original 12% fixed rate and accrued interest of $1,243,665. Term note accrues interest at a per
annum rate equal to the lesser of prime (5.75% as of March 31, 2005) plus 3.0% or 9.5% and requires
monthly principal repayments of $19,193 commencing on July 31, 2005 and continuing on the last day
of each calendar month with a balloon payment for the remaining principal amount due December 31,
2006 (See Note 7). There are no covenants in connection with these notes. 10




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued Long-term debt consists of the following: December 31, 2004
    
    
    March 31, 2005(Unaudited)Stockholder term note with an entity controlled
by a principal stockholder of the Company,
collateralized by all assets of Borrower, with
interest due at a rate per annum equal to the
lesser of prime plus 3.0% or 9.5% fixed rate, due
April 30, 2006 (See Note 7).
    
    
    6,909,582
    
    
    
    6,909,582Other long-term debt
    
    
    34,823
    
    
    
    31,954Total long-term debt
    
    
    6,944,405
    
    
    
    6,941,536Less current maturities
    
    
    (127,175
    )
    
    
    (185,153
    )Total long-term debt less current maturities
    
    $
    6,817,230
    
    
    $
    6,756,383
 9. Series D Redeemable Convertible Preferred Stock During October 2002 through June 2003, the Company issued 150,670 shares of Series D Preferred
Stock as partial consideration for the acquisition of DCi and for related investment banking fees.
Each share of Series D Preferred Stock has a stated value of $10.00 with a conversion option to
common stock at $1.50 per share of Company common stock. The Series D Preferred Stock provides
redemption rights for the holders and the Company, and other rights as described in the Certificate
of Designation of the Series D Preferred Stock. The Series D Preferred Stock is redeemable at its
stated value at the holders option upon written notice at any time after October 11, 2004, to the
extent permitted by applicable law. At March 31, 2005, the Company had a consolidated
stockholders deficit of $7,250,711 and in accordance with Delaware law, is precluded from
redeeming its outstanding Series D convertible preferred stock. As a result, no redemption may be
paid for Holder Redemption Notices received by the Company while it has a consolidated
stockholders deficit. The value of the 150,670 shares issued and outstanding at March 31, 2004 reflected a discount
of $61,269 from the stated value of $1,506,700 that was recorded as imputed interest expense until
the initial redemption date of October 11, 2004. Imputed dividends recognized during the quarter
ended March 31, 2004 in the amount of $26,259 have been reclassified from additional paid in
capital to interest expense to conform to current period presentation. The Series D Preferred
Stock was redeemable at its stated value at the Companys option upon written notice at any time
after October 11, 2005 or prior to that date if the Companys common stock has a weighted average
closing price of $3.75 per share for ten consecutive trading days. Holders of Series D redeemable
convertible preferred stock have no voting rights except as required by law. Series D Preferred
Stock of $1,506,700 and $45,320 at December 31, 2004 and March 31, 2005, respectively is presented
as a current liability because of the October 11, 2004 initial redemption date. Effective March 21, 2005, the Company temporarily lowered the conversion price of each of its
outstanding Series D Redeemable Convertible Preferred Shares from $1.50 to $0.55 per share. As a
result, each Preferred Share was convertible into 18.18 shares of ViewCast common stock based on a
stated value of $10.00 per Preferred Share so long as the stockholder converted by 5:00 p.m.
Central Time on or before April 15, 2005. During March 2005, stockholders converted 146,138 shares
of Series D Redeemable Convertible Preferred Stock into 2,657,058 shares of common stock of the
Company. Subsequent to March 31, 2005, the remaining shareholders converted 4,532 shares of
Series D Redeemable Convertible Preferred Stock into 82,400 shares of common stock of the Company.
The conversions were made pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended. The Company accounts for the conversion of convertible debt to equity securities in accordance with
SFAS No. 84, Induced Conversions of Convertible Debt. In other income (expense), the Company has
recognized an imputed amount for debt conversion expense equal to the fair value of all securities
and other consideration transferred in the transaction in excess of the fair value of securities
issuable pursuant to the original conversion 11




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued terms. The following table summarizes the accounting for the Series D Redeemable Convertible
Preferred Stock conversions that occurred during the three months ended March 31, 2005 (Unaudited). Increase in CommonConversion of Series D Redeemable
    
    Number of Equity
    
    
    Principal Amount of
    
    
    Debt Conversion
    
    
    Stock, Par and PaidConvertible Preferred Shares
    
    Securities
    
    
    Debt Reduction
    
    
    Expense
    
    
    in CapitalConversion shares under original terms
    
    
    974,254Principal amount converted into equity
    
    
    
    
    
    $
    1,461,380
    
    
    
    
    
    
    $
    (1,461,380
    )Additional conversion shares under
lowered conversion terms
    
    
    1,682,804
    
    
    
    
    
    
    $
    471,186
    
    
    $
    (471,186
    )2,657,058
    
    
    $
    1,461,380
    
    
    $
    471,186
    
    
    $
    (1,932,566
    )
 This conversion transaction results in a net reduction in convertible debt and an increase in
net equity of $1,461,380. The debt conversion expense is a non-cash charge and is a reconciling
adjustment in calculating net cash used in operating activities. 10. Net Loss Per Share Basic loss per share is calculated by dividing net loss by the number of weighted average
common shares outstanding for the period. Since the Company has reported net losses for all
periods presented, the computation of diluted loss per share excludes the effects of convertible
preferred stock, convertible debt, options, and warrants since their effect is anti-dilutive. Following is a summary of excluded securities: For the Three Months EndedMarch 31,2004
    
    
    2005(Unaudited)
    
    
    (Unaudited)Stock options
    
    
    3,252,406
    
    
    
    2,787,449Public and private warrants
    
    
    4,184,512
    
    
    
    4,835,482Convertible debentures
    
    
    190,000
    
    
    
    Convertible preferred stock  Series B
    
    
    2,206,896
    
    
    
    2,206,896Convertible preferred stock  Series C
    
    
    3,333,333
    
    
    
    3,333,333Redeemable convertible preferred Stock  Series D
    
    
    1,004,466
    
    
    
    543,43314,171,613
    
    
    
    13,706,593
 11. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, in its primary financial statements and has provided supplemental
disclosures required by Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting
for Stock-Based Compensation and by Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure an amendment of FASB Statement No. 123. Option exercise prices are equal to the market price on the date of grant. In general, a
portion of the shares under grant become exercisable after one year and remaining shares vest
monthly thereafter on a straight line basis over the vesting term of the option. Options expire
after ten years. 12




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued SFAS 123 requires the disclosure of pro forma net income and earnings per share
information computed as if the Company had accounted for its employee stock options granted under
the fair value method set forth in SFAS 123. The fair value for these options was estimated at the
date of grant using the Black-Scholes option pricing model. For purposes of pro forma disclosures, the estimated fair value of the options is amortized as
expense over the options vesting periods. Pro forma information for the three months ended March
31, 2004 and 2005 is as follows: Three Months Ended March 31,2004
    
    
    2005(Unaudited)
    
    
    (Unaudited)Net loss applicable to common
stockholders:
    
    
    (692,997
    )
    
    
    (1,402,509
    )As reportedDeduct total stock-based
compensation
under fair value based method
for all
awards, net of related tax expense
    
    
    (312,195
    )
    
    
    (113,672
    )Pro forma
    
    $
    (1,005,192
    )
    
    $
    (1,516,181
    )Net loss per share:As reported
    
    $
    (0.03
    )
    
    $
    (0.06
    )Pro forma  basic and diluted
    
    $
    (0.05
    )
    
    $
    (0.07
    )
 In December 2004, the Financial Accounting Standards Board (FASB) enacted Statement of
Financial Accounting Standards 123  revised 2004 (SFAS 123R), Share-Based Payment,which
replaces Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensationand supersedes APB Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees.SFAS 123R requires the measurement of all employee share-based payments to employees,
including grants of employee stock options, using a fair-value-based method and the recording of
such expense in the Companys consolidated statement of operations. The accounting provisions of
SFAS 123R are effective for reporting periods beginning after December 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. See the Stock-Based Compensationsection shown earlier in this
note for the pro forma net loss and loss per share amounts for the three months ending March 31,
2004 and March 31,2005 as if the Company had used a fair-value-based method required under SFAS 123
to measure compensation expense for employee stock incentive awards. Although the Company has not
yet determined whether the adoption of SFAS 123R will result in amounts that are different from the
current pro forma disclosures under SFAS 123, the Company is evaluating the requirements under SFAS
123R and expect the adoption to have a significant impact on the Companys consolidated statement
of operations and loss per share, but no impact on its financial condition or cash flows. 12. Segment Information The Company operates in two distinct business segments (i) Video Communications Products and
Services and (ii) IT Services and Products: Video Communications Products and Services This business segment is engaged in designing, developing and marketing video communications
products and services. The operations of the Companys Osprey® line of video capture and video
compression-decompression
cards, its ViewCast IVN and Viewpoint VBX video distribution systems, and its Niagara line
of encoding and streaming products are included in this segment. 13




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued IT Services and Products This business segment includes the operations of Delta Computec Inc. which is headquartered in
Teterboro, New Jersey and provides customized network support, Internet and Intranet consulting,
networking, maintenance, disaster recovery services as well as computer and networking product
sales to Fortune 500 and 1000 companies. Customers include financial institutions, accounting
firms, healthcare providers, pharmaceutical companies and educational institutions primarily in the
northeastern United States. Corporate The corporate functions of human resources, legal, financial reporting, accounting, and risk
management are located in Dallas, TX. Operating expenses not distributed to business segments
include certain officers salaries, investor relations, shareholder meetings, and other corporate
facility expenses. The Companys underlying accounting records are maintained on a legal entity basis for
government and public reporting requirements. Segment disclosures are on a performance basis
consistent with internal management reporting. The Company evaluates performance based on sales,
gross margins and operating income and expense. Not all corporate operating expenses are
distributed to the business segments. The following tables provide financial data by segment for the three months ended March 31,
2004 and 2005: Summary of Sales by
Geographic Area for the Three Months Ended (Unauditied): VideoCommunicationsIT Services,
    
    
    Products &Products
    
    
    Services
    
    
    Total
    
    
    %March 31, 2005United States
    
    $
    2,901,019
    
    
    $
    1,336,317
    
    
    $
    4,237,336
    
    
    
    77.66
    %Europe
    
    
    
    
    
    
    504,664
    
    
    
    504,664
    
    
    
    9.25
    %Pacific Rim
    
    
    
    
    
    
    481,252
    
    
    
    481,252
    
    
    
    8.82
    %Other
    
    
    
    
    
    
    232,924
    
    
    
    232,924
    
    
    
    4.27
    %Total
    
    $
    2,901,019
    
    
    $
    2,555,157
    
    
    $
    5,456,176
    
    
    
    100.00
    %March 31, 2004United States
    
    $
    2,713,199
    
    
    $
    1,064,318
    
    
    $
    3,777,517
    
    
    
    75.87
    %Europe
    
    
    
    
    
    
    604,723
    
    
    
    604,723
    
    
    
    12.15
    %Pacific Rim
    
    
    
    
    
    
    496,884
    
    
    
    496,884
    
    
    
    9.98
    %Other
    
    
    
    
    
    
    99,896
    
    
    
    99,896
    
    
    
    2.01
    %Total
    
    $
    2,713,199
    
    
    $
    2,265,821
    
    
    $
    4,979,020
    
    
    
    100.00
    %
 14




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued Summary of Operations by Operating Segment for the
Three Months Ended March 31, 2005 (Unaudited): VideoCommunicationsIT Services,
    
    
    Products &
    
    
    UnallocatedProducts
    
    
    Services
    
    
    Corporate
    
    
    TotalTotal sales
    
    $
    2,901,019
    
    
    $
    2,556,464
    
    
    $
    
    
    
    $
    5,457,483Intersegment sales
    
    
    
    
    
    
    (1,307
    )
    
    
    
    
    
    
    (1,307
    )Revenue from external customers
    
    $
    2,901,019
    
    
    $
    2,555,157
    
    
    $
    
    
    
    $
    5,456,176Gross profit
    
    $
    640,351
    
    
    $
    1,525,027
    
    
    $
    
    
    
    $
    2,165,378Operating income (loss)
    
    $
    2,883
    
    
    $
    (251,131
    )
    
    $
    (266,988
    )
    
    $
    (515,236
    )Total assets
    
    $
    4,921,660
    
    
    $
    3,584,285
    
    
    $
    167,663
    
    
    $
    8,673,608Goodwill
    
    $
    1,041,430
    
    
    $
    
    
    
    $
    
    
    
    $
    1,041,430Customer contracts
    
    $
    165,151
    
    
    $
    
    
    
    $
    
    
    
    $
    165,151Software Development Costs
    
    $
    
    
    
    $
    169,030
    
    
    $
    
    
    
    $
    169,030Capital additions
    
    $
    25,576
    
    
    $
    19,458
    
    
    $
    12,299
    
    
    $
    57,333
 Summary of Operations by Operating Segment for the
Three Months Ended March 31, 2004 (Unaudited): VideoCommunicationsIT Services,
    
    
    Products &
    
    
    UnallocatedProducts
    
    
    Services
    
    
    Corporate
    
    
    TotalTotal sales
    
    $
    2,714,767
    
    
    $
    2,265,821
    
    
    $
    
    
    
    $
    4,980,588Intersegment sales
    
    
    (1,568
    )
    
    
    
    
    
    
    
    
    
    
    (1,568
    )Revenue from external customers
    
    $
    2,713,199
    
    
    $
    2,265,821
    
    
    $
    
    
    
    $
    4,979,020Gross profit
    
    $
    559,087
    
    
    $
    1,410,573
    
    
    $
    
    
    
    $
    1,969,660Operating income (loss)
    
    $
    (128,866
    )
    
    $
    55,496
    
    
    $
    (167,933
    )
    
    $
    (241,303
    )Total assets
    
    $
    5,226,898
    
    
    $
    2,861,032
    
    
    $
    276,173
    
    
    $
    8,364,103Goodwill
    
    $
    1,041,430
    
    
    $
    
    
    
    $
    
    
    
    $
    1,041,430Customer contracts
    
    $
    357,639
    
    
    $
    
    
    
    $
    
    
    
    $
    357,639Software Development Costs
    
    $
    
    
    
    $
    49,837
    
    
    $
    
    
    
    $
    49,837Capital additions
    
    $
    106,574
    
    
    $
    19,137
    
    
    $
    15,055
    
    
    $
    140,766
 15




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ViewCast.com, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements  Continued 13. Related Party Transaction Since October 1998, the Company has maintained a working capital line of credit facility with
a partnership controlled by one of its principal stockholders and Chairman of the Board of the
Company, H. T. Ardinger, Jr. (See Note 7). Effective March 22, 2005, the Company amended the terms
and conditions of the credit facility to increase the credit line of the Revolving Credit Note from
$3.0 million to $3.5 million and extended the commencement date for scheduled payments of the Term
Note and Accrued Interest from December 31, 2004 to July 31, 2005. On March 24, 2005, John DeVito, President of DCi, converted 3,355 shares of Series D
Redeemable Convertible Preferred Stock into 61,000 shares of common stock of the Company. 14. Subsequent Events During April 2005, shareholders converted 4,532 shares of Series D Redeemable Convertible
Preferred Stock into 82,400 shares of common stock of the Company. The company no longer has any
Series D Preferred shares outstanding. On April 15, 2005, the DCi asset based revolving credit facility with Keltic Financial
Partners, LP (Keltic) was amended to extend the maturity date of the note to July 15, 2005 and to
extend the date related to penalties for early prepayment or termination of the loan from April 15,
2005 to July 15, 2005. In April 2005, Keltic was paid $3,500 in modification fees pertaining to
this note amendment. The credit facility continues to be secured by all DCi assets and is
guaranteed by the Company. 16




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ViewCast.com, Inc. and Subsidiaries
Managements Discussion and Analysis or
Plan of Operation 
 Item 2. Managements Discussion and Analysis or Plan of Operation Certain statements in this Report on Form 10-QSB under Managements Discussion and Analysis
or Plan of Operation and elsewhere in this Report constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements
include statements regarding ViewCasts expectations, beliefs, hopes, intentions or strategies
regarding the future. These statements involve known and unknown risks, uncertainties, and other
factors that may cause ViewCast or our industrys actual results, levels of activity, performance
or achievements to be materially different from any future results, levels of activity, performance
or achievements expressed or implied by such forward-looking statements. Such factors include, but
are not limited to, product demand and market acceptance risks, the impact of competitive products
and pricing, product development, commercialization and technological difficulties, capacity and
supply constraints or difficulties, general business and economic conditions, the availability of
sufficient working capital, the ability to service our debt, continued losses, the ability to
successfully integrate acquired operations, the effect of our accounting polices and other risks
detailed in our Annual Report on Form 10-KSB/A for the year ended December 31, 2004 and other
filings with the Securities and Exchange Commission. In some cases, you can identify forward-looking statements by terminology such as may,
will, expects, should, anticipates, believes, estimates, predicts, plans,
potential, intends or continue or the negative of such terms or other comparable terminology. Although we believe the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.
Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness
of such statements. We are under no duty to update any of the forward-looking statements after the
date of this report to conform such statements to actual results. Overview ViewCast.com, Inc., doing business as ViewCast Corporation (ViewCast), develops video and
audio communications products for delivering content dynamically via a variety of network types and
protocols. These products include Osprey® Video capture cards, Niagara® video
encoders/servers, and ViewCast IVN enterprise software and systems. ViewCast products address the
video capture, processing, and delivery requirements for a broad range of applications and markets.
ViewCast also provides professional IT services focused on merged data and video networks through
its wholly owned subsidiary Delta Computec Inc. (DCi). ViewCast operates in two distinct business segments: (1) video communications products and
services and (2) IT services and products. Video Communications Products and Services This business segment is engaged in designing, developing and marketing video communications
products and services. The products enable sophisticated video processing and communications and
include the Ospreyâ line of video capture cards, the ViewCast IVN (Interactive Video
Network) systems, the NiagaraÔ line of video encoding systems and servers, and related
application software such as SimulStream and SCX. These products are installed in computers,
appliances, or within a communications network and are used for a variety of video communication
applications, including corporate communications, information gathering, security, training,
distance learning, conferencing, Internet video and broadcast applications. Corporations, media
organizations, financial institutions, educational networks, healthcare facilities, and government
agencies utilize our products and services, as do their customers, vendors and others with whom
they may communicate. ViewCast markets its video products and services directly to end-users,
through original equipment manufacturers (OEMs), value-added resellers (VARs) and computer
system integrators, worldwide. 17




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ViewCast.com, Inc. and Subsidiaries
Managements Discussion and Analysis or
Plan of Operation  (Continued) IT Services and Products This business segment includes the operations of DCi which provides customized network
support, Internet and Intranet consulting, networking, maintenance and disaster recovery services
as well as computer and networking product sales to Fortune 500 and 1000 companies. Customers
include financial institutions, accounting firms, healthcare providers, pharmaceutical companies
and educational institutions primarily in the northeastern United States. ViewCast participated in the National Association of Broadcasters tradeshow in April 2005 and
introduced a new addition to the Niagara line of streaming encoders, the Niagara PowerStream Pro, a
high-performance video capture and streaming encoder specifically designed to meet the needs of
professional broadcasters. The Niagara PowerStream Pro features a rack-mounted, console-free design
that can be remotely monitored, managed, and controlled via any IP-networked workstation. We
expect continued growth in the Niagara and IVN product sales during the remainder of 2005. Critical Accounting Policies Managements discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America (USGAAP). We review the
accounting policies we use in reporting our financial results on a regular basis. The preparation
of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis we evaluate our estimates, including those related to
accounts receivable, inventories, investments, warranty obligations, income taxes, restructuring
and contingencies and litigation. Our estimates are based on historical experience and other
assumptions that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources. In addition to the items listed above which are affected by
estimates, we believe that the following are critical accounting policies used in the preparation
of our consolidated financial statements:  
    Revenue Recognition We apply provisions of SEC Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements as revised by SAB 104, Revenue
Recognition, SOP 97-2, Software Revenue Recognition, as amended by SOP 98-9,
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions and EITF 00-21, Revenue Arrangements with Multiple Deliverables to
transactions involving sales of our hardware and software products. Under these
guidelines, we recognize revenue on transactions where persuasive evidence of an
arrangement exists, title has transferred, product payment is not contingent upon
performance of installation or service obligations, the price is fixed or determinable
and payment is reasonably assured. We accrue warranty costs and sales allowances for
promotional activities at time of shipment based on historical experience. In addition,
we defer revenue associated with maintenance and support contracts and recognize
revenue ratably over the contract term.
    Allowance for Doubtful Accounts We maintain allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers or distribution partners were to
deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required.
    Excess and Obsolete Inventories We write down our inventories for estimated
obsolescence and unmarketable inventory equal to the difference between the cost of the
inventory and the estimated market value based upon assumptions about future demand and
market conditions. If actual market conditions are less than those projected by
management, additional write-downs may be required.
    Deferred Taxes We record a valuation allowance to reduce our deferred tax assets
to an amount that we believe is more likely than not to be realized. In our opinion,
realization of our net operating loss 18




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ViewCast.com, Inc. and Subsidiaries
Managements Discussion and Analysis or
Plan of Operation  (Continued) carryforward is not reasonably assured, and a
valuation allowance has been provided against deferred tax assets in excess of deferred tax liabilities in the accompanying consolidated
financial statements. However, should we in the future determine that realization of
deferred tax assets in excess of recorded amounts is likely, an adjustment to the
deferred tax assets would increase income in the period such determination was made. Results of Operations Three Months Ended March 31, 2005 compared to Three Months Ended March 31, 2004. Net Sales.Net sales for the quarter ended March 31, 2005 increased by 9.6% to $5,456,176 from
$4,979,020 reported for the same period in 2004. The increase was attributable to increases in
both video communications product and IT services and product sales. Video Communications Product and Service Sales.During the first quarter ended March 31,
2005, total video communications product and service sales of $2,556,464 increased by 12.8%
compared to first quarter revenues in 2004 of $2,265,821. The improvement was due to increased
sales from both video systems and video capture cards. Osprey Product Sales. During the three months ended March 31, 2005, sales of Osprey® video
component and software products increased 5.0% over 2004 levels. The increased Osprey first quarter
revenues reflected a combination of increased shipments of our Osprey-500 series and Osprey-200
series product families. Video Communications System and Applications Software Products.During the three months ended
March 31, 2005, combined video system and software sales increased 57.5% over 2004 first quarter.
The increase in three-month sales was due to increased multi-unit sales of ViewCasts Niagara
systems and the completion of certain other IVN product sale opportunities. IT Services and Products.ViewCasts DCi subsidiary is a provider of professional information
technology and customized network support services to Fortune 500 and Fortune 1000 corporations,
mid-sized companies, hospitals, health care facilities and financial institutions primarily in the
northeastern United States. During the first quarter of 2005, IT services and product sales
increased 6.9% to $2,901,019 from the $2,713,199 reported in the comparable 2004 period. The
increases were primarily due to higher service project sales than the prior year. During the quarter ending March 31, 2005, service fees provided 84.5%, of the IT service and
product revenues while product sales provided the remainder. During the quarter ending March 31,
2004, service fees provided 83.8%, of the IT service and product revenues while product sales
provided the remainder. Other Revenues.Other video product and service revenues consist of software maintenance,
training, engineering consulting fees and professional services. These revenues represented 0.5%
of consolidated revenues for the three months ended March 31, 2005. For the quarter ended March
31, 2005 other revenues totaled $26,895, a slight decrease over the
quarter ended March 31, 2004 of
$36,237. Cost of Sales and Gross Margins.Cost of sales totaled $3,290,798 for the quarter ended March
31, 2005, a 9.4% increase from the $3,009,360 reported for the same period in 2004. Gross profit
margin for the quarter ended March 31, 2005 was $2,165,378 or 39.7% compared to $1,969,660 or 39.6%
in 2004. The video products segments margin for the first quarter of 2005 was 59.7% compared to
62.3% in 2004 and contributed 70.4% of the 2005 gross margin compared to 71.6% of the first quarter
gross margin in 2004. The IT services and products margin for the first quarter of 2005 was 22.1%
an improvement compared to 20.6% in 2004 due to slightly higher margins from service sales.
Margins on sales vary period to period depending on the mix of third-party products sold and the
relative availability of those products in the market. The IT services and products segment
contributed 29.6% of the 2005 gross margin compared to 28.4% of the first quarter gross margin in
2004. We expect future margins for IT services and products to average in the 20%-30% range compared
to the video products segments historical margins in the 50%-60% range. Margins will be affected
quarter to quarter by 19




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ViewCast.com, Inc. and Subsidiaries
Managements Discussion and Analysis or
Plan of Operation  (Continued) promotional activities, price adjustments, cost of materials, inventory
obsolescence, the introduction of new products and the sales mix between products and services in
any one reporting period. Selling, General and Administrative Expense.Selling, general and administrative (SG&A)
expenses for the three months ended March 31, 2005 totaled $1,967,132, an increase from the
$1,682,910, reported last year for the same period. The increase reflects the additional sales and
marketing activities and personnel for the video products segment added after the first quarter of
2004 offset by lower expenses in finance and administration. ViewCast also incurred expenses
during the quarter related to its participation in a major tradeshow during April. Research and Development Expense.Research and development expense for the three months ended
March 31, 2005 totaled $614,767, an increase of 44.6% over 2004 levels, reflecting a increase in
personnel and related expenses compared to the first three months of 2004. There were no material
research and development expenses associated with DCi operations during the first three months of
2005 or 2004. Increased expenses are related to the introduction of the Niagara PowerPro in April
2005 and the expected release of new products throughout 2005. Other Expense. Total other expense for the first quarter in 2005 totaled $685,268 compared to
$221,186 in 2004. Other expense had a significant increase in expense recognition due to a one-time charge for
debt conversion expense. During the quarter ended March 31, 2005, ViewCast recognized a non-cash
debt conversion charge of $471,186 related to the conversion of $1,461,380 principal amount of
outstanding Series D Redeemable Convertible Preferred Stock into common stock of ViewCast. The
non-cash charge was recorded in accordance with SFAS No. 84, Induced Conversions of Convertible
Debt. In other expense, the Company has recognized an imputed amount for debt conversion expense
equal to the fair value of all securities and other consideration transferred in the transaction in
excess of the fair value of securities issuable pursuant to the original conversion terms. This
conversion transaction results in a net reduction in convertible debt and an increase in net equity
of $1,461,380. The debt conversion expense is a non-cash charge and is a reconciling adjustment in
calculating net cash used in operating activities. See Note 9 to the Consolidated Financial
Statements for further details regarding this transaction. Interest expense during the first quarters of 2005 and 2004 was $213,065 and $219,920,
respectively, representing interest primarily from our stockholder debt, debentures, DCis
line-of-credit financing and amortization of related issue costs. Interest expense during the
first quarter of 2005 has decreased over 2004 levels by 3.1%, principally due to lower overall
outstanding principal balances during the period. Net Loss.Net loss for the three months ended March 31, 2005 was $1,200,504. Net Loss was
substantially affected by an increase in expense recognition due to a one-time charge for debt
conversion expense. Excluding the non-cash debt conversion expense of $471,186 described above,
net loss for the three months ended March 31, 2005 would have been $729,318, representing an
increase compared to the loss of $482,489 reported for the first three months of 2004. Liquidity and Capital Resources ViewCasts primary sources of funds for conducting its business activities are derived from
sales of its products and services, from its credit facilities and from the placement of its equity
securities with investors. ViewCast requires working capital primarily to increase inventories and
accounts receivable during sales growth, develop products, service debt, purchase capital assets,
fund operations and strategic acquisitions. Net cash provided by operating activities for the three months ended March 31, 2005 was
$163,163 resulting from the net loss of $1,200,504 reduced for non-cash adjustments totaling
$718,628, including the non-cash debt conversion expense of $471,186, and further offset by a net
increase in operating liabilities over increases in operating assets of $645,039. Compared to the
three months ended March 31, 2004, the net cash provided by operating activities for the first
three months ended March 31, 2004 declined by $477,201 principally due to the 20




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ViewCast.com, Inc. and Subsidiaries
Managements Discussion and Analysis or
Plan of Operation  (Continued) increase in the net
operating loss from expenditures for additional sales, marketing and engineering personnel and for
trade shows and new product prototypes. Cash utilized for investing activities during the three months ended March 31, 2005 totaled
$57,333 for the purchases of property and equipment. During the three months ended March 31, 2005, ViewCasts financing activities utilized cash of
$213,062 principally for the repayment of the Keltic debt and other short-term borrowings totaling
$313,062 offset by short-term borrowings under ViewCasts stockholder line of credit facility of
$100,000. Since October 1998, the Company has maintained a working capital line of credit facility with
an entity controlled by one of its principal stockholders, Mr. H.T. Ardinger, who also currently
serves as Chairman of the Board of Directors of the Company. Prior to October 15, 2003,
availability of funds under this facility was subject to certain borrowing base limitations based
principally on qualifying accounts receivable and inventory with interest payable on demand at 12%
and secured by the assets of ViewCast.com, Inc. In October 2003, ViewCast.com, Inc., Osprey
Technologies, Inc. and VideoWare, Inc. (jointly and severally, the Borrower) amended the terms
and conditions of this credit note and security agreement with the Ardinger Family Partnership,
LTD. (Lender). As of the date of the agreement, the outstanding principal balance of the
indebtedness under the original loan agreement was $7,509,582 and accrued and unpaid interest
thereon was $1,243,665. Additionally, in October 2003 the Company had outstanding $500,000 in
advances from Lender for the purchase of DCi in October 2002. Effective October 15, 2003, the
terms and conditions of the note agreement were amended to establish a long-term payout for
$6,909,582 principal amount of the note and accrued interest of $1,243,665. Additionally, a new
$2.0 million short-term line of credit facility was established with an initial principal amount
$1.1 million consisting of $600,000 principal amount of the original note and $500,000 of
stockholder advances. The amended note agreement reduces the per annum interest rate on
stockholder notes from 12% to the lesser of prime plus 3.0% or 9.5%, eliminates the borrowing base
requirements based on outstanding accounts receivable and inventory and is secured by all assets of
the Borrower. Effective April 30, 2004, the Company amended the terms and conditions of the credit facility
to increase the credit line of the revolving credit note to $2.25 million and extended the
commencement date for the scheduled payments of the term note and accrued interest from April 30,
2004 to August 31, 2004. Effective August 13, 2004, the Company amended the terms and conditions
of the credit facility to increase the credit line of the revolving credit note to $3.0 million and
extended the commencement date for the scheduled payments of the term note and accrued interest
from August 31, 2004 to December 31, 2004. Effective March 22, 2005, the Company amended the terms
and conditions of the credit facility to increase the credit line of the revolving credit note to
$3.5 million and extended the commencement date of scheduled payments of the term note and accrued
interest from December 31, 2004 to July 31, 2005. During the three months ended March 31, 2005, net borrowings under the new stockholder line of
credit note were $100,000 resulting in a note principal balance of $3,000,000. At March 31, 2005,
the Company had availability under the stockholder line of credit of $500,000. At March 31, 2005
the Company had outstanding $234,407 in stockholder accrued interest attributable to the
stockholder line of credit. The Company also maintains a $1.5 million asset based revolving credit facility with Keltic
Financial Partners, LP (Keltic) for working capital support of DCi operations. Draws on the
revolving credit facility are based on qualifying DCi accounts receivable. The loan balance is
reduced as cash collections are received directly by Keltic. The Company has entered into a
Guaranty of Payment and a Performance and Subordination Agreement with Keltic relating to this
facility. During the three months ended March 31, 2005, cash collections in excess of draws
reduced the Keltic loan balance to $2,977 at March 31, 2005. DCi had availability of $1,097,126
under the revolving credit facility as of March 31, 2005. On December 10, 2004, the Keltic credit facility was amended to extend the maturity date of
the note to January 10, 2005 and to extend the date related to penalties for early prepayment or
termination of the loan from December 11, 2004 to January 10, 2005. On January 10, 2005, the
Keltic credit facility was amended to extend the maturity date of the note to February 15, 2005 and
to extend the date related to penalties for early prepayment or termination 21




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ViewCast.com, Inc. and Subsidiaries
Managements Discussion and Analysis or
Plan of Operation  (Continued) of the loan from
January 11, 2005 to February 15, 2005. On February 15, 2005, the Keltic credit facility was amended
to extend the maturity date of the note to April 15, 2005 and to extend the date related to
penalties for early prepayment or termination of the loan from February 15, 2005 to April 15, 2005.
On April 15, 2005, the Keltic credit facility was amended to extend the maturity date of the note
to July 15, 2005 and to extend the date related to
penalties for early prepayment or termination of the loan from April 15, 2005 to July 15,
2005. In April 2005, Keltic was paid $3,500 in modification fees pertaining to the April note
amendment. During October 2002 through June 2003, the Company issued 150,670 shares of Series D Preferred
Stock as partial consideration for the acquisition of DCi and for related investment banking fees.
Each share of Series D Preferred Stock has a stated value of $10.00 with a conversion option to
common stock at $1.50 per share of Company common stock. The Series D Preferred Stock provides
redemption rights for the holders and the Company, and other rights as described in the Certificate
of Designation of the Series D Preferred Stock. The Series D Preferred Stock is redeemable at its
stated value at the holders option upon written notice at any time after October 11, 2004, to the
extent permitted by applicable law. At March 31, 2005, the Company had a consolidated
stockholders deficit of $7,250,711 and in accordance with Delaware law, is precluded from
redeeming its outstanding Series D convertible preferred stock. As a result, no redemption may be
paid for Holder Redemption Notices received by the Company while it has a consolidated
stockholders deficit. Effective March 21, 2005, the Company temporarily lowered the conversion price of each of its
outstanding Series D Redeemable Convertible Preferred Shares from $1.50 to $0.55 per share. As a
result, each Preferred Share was convertible into 18.18 shares of ViewCast common stock based on a
stated value of $10.00 per Preferred Share so long as the stockholder converted by 5:00 p.m.
Central Time on or before April 15, 2005. During March 2005, stockholders converted 146,138 shares
of Series D Redeemable Convertible Preferred Stock into 2,657,058 shares of common stock of the
Company. Subsequent to March 31, 2005, the remaining shareholders converted 4,532 shares of
Series D Redeemable Convertible Preferred Stock into 82,400 shares of common stock of the Company.
The conversions were made pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.
This conversion transaction resulted in a net reduction in convertible debt and an increase in net
equity of $1,461,380. The debt conversion expense is a non-cash charge and is a reconciling
adjustment in calculating net cash used in operating activities. During the quarter ended March
31, 2005, ViewCast recognized a non-cash debt conversion charge of $471,186 related to this
transaction that is more fully described in Note 9 to the Consolidated Financial Statements. At March 31, 2005, ViewCast had 3,799,680 public and public equivalent warrants and 122,500
representative warrants outstanding and exercisable at $1.00. The warrants are redeemable by
ViewCast under certain conditions. At March 31, 2005, ViewCast had a consolidated stockholders deficit of $7,250,709, and in
accordance with Delaware law, was precluded from paying dividends on its outstanding Series B and
Series C convertible preferred stock. As a result, no preferred stock dividends have been declared
or paid during 2004. The Series B and Series C preferred stock issues carry cumulative dividends
of 8% and 9% per year, respectively, and are generally payable semi-annually in arrears in cash or
in ViewCast common stock, at ViewCasts option. Cumulative dividends in arrears on preferred
shares are approximately: Series B-$2,100,000, Series C-$614,000. Holders of Series B and Series C
preferred stock have no voting rights except as required by law. At March 31, 2005, ViewCast had a working capital deficit of $1,548,423 and cash and cash
equivalents of $264,943. During the three months ended March 31, 2005, ViewCast experienced a
sales increase of 9.6% compared to the same period of 2004. Excluding the non-cash debt conversion
charge of $471,186, consolidated net operating loss for the three months ended March 31, 2005 was
higher by approximately $264,000 compared to the same period in 2003, due to investment in
additional personnel and related expenses in sales, marketing and development plus trade show and
new product introduction expenses. ViewCast anticipates that losses may continue during 2005, or
until such time as total profit margins from the sales of its products and services exceeds its
total development, selling, administrative and financing costs. ViewCast utilizes significant capital to design, develop and commercialize its products and
intends to fund its operating activities and sales growth during the next twelve months by
utilizing cash contributed from operations and its available working capital lines of credit to the
extent possible. ViewCast anticipates it will require additional capital during the balance of 2005
for working capital to support the expansion of sales channels and market 22




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ViewCast.com, Inc. and Subsidiaries
Managements Discussion and Analysis or
Plan of Operation  (Continued) distribution, to develop
and introduce new products and services, to enhance existing product offerings, to address
unanticipated competitive threats or technical problems, to transition adverse economic conditions
and to service its debt. During 2005 ViewCast plans to improve its working capital position by
increasing sales and through other initiatives that may include raising additional equity,
conversion of debt to equity, further acquisitions and by exercise of warrants if market conditions
allow. Certain actions have already occurred. In April 2004, $870,000 of
debentures converted into equity. In March and April 2005, $1,506,700 of Series D redeemable
convertible preferred stock converted into common stock equity. ViewCast intends to continue
these initiatives and discussions related to current and potentially new debt and equity
relationships. Although ViewCast has no firm arrangements with respect to additional financing, it
is currently considering proposals relating to the issuance of equity securities in exchange for a
cash investment in ViewCast. There can be no assurance that additional financing will be available
to ViewCast on acceptable terms, or at all. Additional equity financing may involve substantial
dilution to our then existing stockholders. ViewCast intends to actively pursue other strategic
merger and acquisition activities to the extent possible. In the event we are unable to raise
additional capital or execute other alternatives, we may be required to sell segments of the
business, or substantially reduce or curtail our activities. Such actions could result in charges
that could be material to ViewCasts results of operations or financial position. At March 31, 2005, ViewCast had no material commitments for capital expenditures. Off-Balance Sheet Arrangements ViewCast does not have any off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on ViewCasts financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors. 23




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ViewCast.com, Inc. and Subsidiaries
Controls and Procedures 
 Item 3. Controls and Procedures Management, including the Companys President and Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this
report. Based upon that evaluation, the President and Chief Executive Officer and Chief Financial
Officer concluded that, as a result of the material weakness in our internal controls over
financial reporting described below, the disclosure controls and procedures were not effective to
ensure that information required to be disclosed in the reports the Company files and submits under
the Exchange Act is (i) recorded, processed, summarized and reported as and when required and (ii)
accumulated and communicated to the Companys management, including its principal executive officer
and principal financial officer, as appropriate to allow timely decisions regarding disclosure. During, and shortly following, the fiscal quarter ended March 31, 2005, we experienced a
significant amount of turnover in our accounting and finance departments. In particular, our
controller and three other accounting managers left the Company with duties related to corporate,
accounts receivable, accounts payable and payroll accounting. Management determined that the loss
of these personnel resulted in conditions which, when considered collectively, constituted a
material weakness in our internal controls. Such conditions included:  
    insufficient resources to perform an appropriate review and supervision of the
preparation of accounting records;
    insufficient resources to complete the preparation of the financial statements on a
timely basis;
    insufficient resources to support efficient preparation and independent auditor review
of the consolidated financial statements; and
    insufficient resources to oversee the preparation of the consolidated financial
statements. During and after the quarter ended, the Company took a number of corrective actions to address
the material weaknesses discussed above, including:  
    filling all vacancies in the accounting and finance departments with new personnel with
greater expertise in accounting, controls and financial reporting,
    adding temporary accounting staff to assist new personnel, and
    appointing a replacement to the Companys former controller. The Company believes that adequate steps are being taken by management to reduce the risk of
ineffective disclosure controls and procedures on a going-forward basis. 24




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ViewCast.com, Inc. and Subsidiaries
Controls and Procedures 
 PART II: OTHER INFORMATION Item 1.
    
    Legal Proceedings(Not Applicable)Item 2.
    
    Changes in Securities and Small Business Issuer Purchases of Equity Securities(Not Applicable)Item 3.
    
    Defaults Upon Senior Securities(Not Applicable)Item 4.
    
    Submission of Matters to a Vote of Security Holders(Not Applicable)Item 5.
    
    Other Information
 (a)
    
    (None)(b)
    
    (None)
 Item 6.
    
    ExhibitsExhibits filed with this report:(See Exhibit Index)
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SIGNATURE In accordance with the requirements of the Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized. ViewCast.com, Inc.(Registrant)BY:Date: May 23, 2005
    
    /s/ George C. PlattGeorge C. PlattChief Executive OfficerPrincipal Executive Officer/s/ Laurie L. LathamLaurie L. LathamChief Financial OfficerPrincipal Financial Officer
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EXHIBIT INDEX ExhibitNumber31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications32.1
    
    Section 1350 Certifications
 27