VIEWCAST COM INC - 10-Q Quarterly Report

Back to GetFilings.com

U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ___________

Commission File Number: 0-29020

VIEWCAST.COM, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)

DELAWARE 75-2528700
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer Incorporation
Incorporation or Organization) Identification No.)

17300 DALLAS PARKWAY, SUITE 2000, DALLAS, TX 75248
--------------------------------------------------
(Address of principal executive offices)

972/488-7200
------------
(Issuer's Telephone Number)

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---

As of August 14, 2002, 20,792,311 shares of the Registrant's common stock were
outstanding.

VIEWCAST.COM, INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 2001 and
June 30, 2002 (Unaudited)...........................................................................3
Consolidated Statements of Operations for the Three and Six Months
ended June 30, 2001 and 2002 (Unaudited)............................................................4
Consolidated Statements of Stockholders' Equity (Deficit) for the
Six Months ended June 30, 2002 (Unaudited)..........................................................5
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2001 and 2002 (Unaudited)............................................................6
Notes to Consolidated Financial Statements.............................................................7

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................................11

PART II. OTHER INFORMATION...............................................................................18

SIGNATURES................................................................................................19

2

VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

See accompanying notes.

3

VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

See accompanying notes.

4

VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 (UNAUDITED)

See accompanying notes.

5

VIEWCAST.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

See accompanying notes.

6

VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE 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,
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 generally
accepted accounting principles for interim financial information. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2001, as amended, filed with the Securities and
Exchange Commission.

The Company utilizes significant capital to design, develop and
commercialize its products. During 2002, the Company expects to fund sales
growth and related operational activities by utilizing its working capital line
of credit and cash contributed from operations. At June 30, 2002, the Company
had exceeded its line-of-credit borrowing base by $2.5 million and had utilized
$4.7 million of the credit facility. The noteholder has agreed to waive through
September 30, 2002 the repayment of any outstanding financing that may be in
excess of the borrowing base from time to time. Effective May 6, 2002, the
Company entered into an agreement with noteholder to sell all of its
available-for-sale securities for a $2.9 million and used all the proceeds for a
principal reduction in its line-of-credit (See Note 3). The Company anticipates
that additional financing will be needed during 2002 in order to meet its
working capital requirements and has had preliminary discussions with potential
sources of financing, and may seek additional financing to provide additional
working capital in the future. Such financing may include the issuance of
convertible preferred stock or other equity securities, conversion of debt to
equity securities, exercise of warrants, divestiture of business segments, or
any combination thereof. The Company has retained an investment-banking firm to
assist in market and strategic alternatives, including divestitures and
acquisitions. The can be no assurance that any additional financing will be
available to the Company on acceptable terms, or at all. Additional equity
financing may involve substantial dilution to the Company's then existing
stockholders. In the event the Company is unable to raise additional capital, it
may be required to curtail its activities. Such actions could result in charges
that could be material to the Company's results of operations or financial
position.

2. INVENTORY

Inventory consists of the following:

7

VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

3. SHORT-TERM DEBT

Effective May 6, 2002, the Company sold its available-for-sale
securities comprised exclusively of 1,140,310 shares of DynTek, Inc. ("DYTK")
common stock to an entity controlled by a principal shareholder and the Chairman
of the Board of the Company. The price per share of DYTK stock of $2.553 was
determined by negotiations between the parties and represented a premium to the
trading value of DYTK shares on May 6, 2002 of $2.00 per share. The sale
agreement also provides that the Company will share in 50% of any gains realized
on the stock above $4.50 per share through February 14, 2003 net of expenses.
Proceeds from the sale of $2,910,641 were used to make a principal reduction in
the Company's outstanding line-of-credit note balance with the same entity.
During the six months ended June 30, 2002, ViewCast borrowed $1,279,378 under
the terms of the line of credit financing arrangement and after taking in to
account the principal reduction of $2,910,641, resulted in a net principal note
reduction of $1,631,263 during the first half of 2002.

In February 2001, the Company amended the facility to increase the credit
line commitment from $9.0 million to $12.0 million, extend the maturity date of
the agreement to March 15, 2003 and expand the asset base for lending to include
certain marketable securities owned by the Company. The line of credit facility
bears interest at 12% per annum and is secured by all assets of the Company. The
availability of funds under the facility is subject to certain borrowing base
limitations based principally on qualifying accounts receivable and inventory
owned by the Company. At June 30, 2002, the outstanding balance of the note was
$4.7 million. The noteholder has agreed to waive through September 30, 2002 the
repayment of any outstanding financing that may be in excess of the monthly
borrowing base. At June 30, 2002, the Company exceeded its borrowing base on the
note by $2.5 million.

4. SHAREHOLDERS' EQUITY

Pursuant to Section 8(b) of the Certificate of Designations of Series B
Convertible Preferred Stock, the Company was required to temporarily lower the
Series B Conversion Price from $3.625 per share to $0.60 per share for a period
of ninety (90) days in conjunction with the issuance of Series C Convertible
Preferred Stock in November of 2001. Notice was given to Preferred B
Stockholders on December 7, 2001 and the temporary Conversion Price Reduction
expired at 5:00 p.m. on March 7, 2002. In March 2002, holders of $1,450,000 of
Series B Convertible Preferred Stock converted their Series B shares into
2,416,666 shares of common stock at $0.60 per share.

The Series B preferred stock is convertible into common stock of the
Company at a fixed price of $3.625 per share, subject to certain requirements,
and carries a dividend of 8% per year payable in cash or common stock of the
Company, at the Company's option.

In January 2002, the Company extended the expiration date of its
outstanding public and public equivalent common stock purchase warrants to
February 3, 2005 from February 3, 2002. Additionally, effective March 1, 2002,
the Company decreased the effective per share exercise price of such warrants
from $4.19 per share of common stock to $1.00 per share of common stock, which
was above the market price at that date. The warrants are redeemable by the
Company under certain conditions. As of June 30, 2002 there were 3,799,680
public and public equivalent warrants outstanding. The reduction of the exercise
price and the extension of the expiration date also apply to the issuance of up
to 122,500 public warrants upon exercise of certain representative warrants.

During the six-month offering period ended March 31, 2002, the Company
received gross proceeds of $10,978 for the sale of 27,776 shares of common stock
to employees pursuant to the Company's Employee

8

VIEWCAST.COM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED

Stock Purchase Plan ("ESPP"). The shares were issued in April 2002 and the
employee purchase price for the offering period was $0.3925 per share.

At June 30, 2002, the Company had a consolidated retained earnings deficit
of $2,988,506, 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 were declared or paid during the
quarter ended June 30, 2002 and preferred dividends of $197,107, accrued during
the first quarter of 2002, were reversed during the quarter ended June 30, 2002.
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 common stock of the Company, at the Company's option.
Cumulative dividends on preferred shares in arrears at June 30, 2002 are
approximately: Series B-$319,123, Series C-$86,795. Holders of Series B and
Series C preferred stock have no voting rights except as required by law.

5. NET LOSS PER SHARE

Basic earnings per share is calculated by dividing net income/loss
applicable to common shareholders by the weighted average number of common
shares outstanding for the period. Since the Company has reported net losses for
the periods presented, the computation of diluted loss per share excludes the
effects of outstanding options, warrants, convertible debt and convertible
preferred stock since their effect is anti-dilutive.

Loss per share calculations for the three months and six months ended June
30, 2001 and 2002 are as follows:

6. COMPREHENSIVE INCOME

The Company translates assets and liabilities of its foreign operations,
whose functional currency is the local currency, at quarter-end exchange rates.
Revenues and expenses are translated at the average rates of exchange prevailing
during the quarter. Adjustments resulting from translating the financial
statements of foreign operations are accumulated in other comprehensive income,
which is reflected as a separate component of stockholders' equity.
Additionally, the Company classifies equity securities it owns that are free of
trading restrictions or to become free of trading restrictions within one year
as "available-for-sale". Available-for-sale securities are carried at fair value
based on quoted market prices and unrealized gains and losses are accumulated in
other comprehensive income, which is a separate component of stockholders'
equity. If a market value adjustment results in a loss of value due to an
other-than-temporary impairment, a

9

loss will be transferred from accumulated other comprehensive income and charged
to other income in the consolidated statement of operations.

Available-for-sale securities is comprised exclusively of shares of DynTek,
Inc. ("DYTK"), formerly TekInsight.com, Inc, common stock acquired through a
strategic business alliance in September of 1998. Effective May 6, 2002, the
Company sold all its available-for-sale securities (1,140,310 DYTK common
shares) to an entity controlled by a principal shareholder and Chairman of the
Board of the Company. The proceeds of $2,910,641 were used to make a principal
reduction in the line-of-credit note balance with the same entity. The selling
price per share of DYTK stock of $2.553 was determined by negotiations between
the parties and represented a premium to the trading value of DYTK shares on May
6, 2002 of $2.00 per share (See Note 3). Other income during the three and six
months ended includes a realized gain on the exchange transaction of $1,071,891.
The quoted market price of TEKS shares at December 31, 2001 was $2.12.

Components of other comprehensive income (loss) for the three and six
months ended June 30, 2001 and 2002 are as follows:

7. RESTRUCTURING CHARGE

During the second quarter of 2002, the Company continued its Board of
Director approved plan of restructuring that included an approximate 18%
reduction in the Company's workforce to decrease operating expenses. Charges
during the second quarter included costs of $112,273 for employee severance.
Personnel reductions were made in the Company's sales, marketing, development
and manufacturing departments. At June 30, 2002 the Company had no accrued
restructuring charges.

10

VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

ViewCast.com, Inc., doing business as ViewCast Corporation, ("ViewCast")
develops and markets a variety of products and services that enable networked
video communications. We are a global provider of enterprise-wide, video
communication products for both real-time and on-demand applications. ViewCast
maximizes the value of video through its products and services: Osprey(R) Video
provides the streaming media industry's de facto standard capture cards,
Niagara(TM) provides integrated hardware and software applications for encoding,
streaming and managing rich media content, Viewpoint VBX(TM) Systems delivers a
wide array of video distribution, gatewaying and conferencing solutions for both
digital and analog enterprise video communication, and ViewCast Online provides
a rich media Application Service Provider ("ASP") solution for Business to
Business ("B2B") and media communication needs. From streaming digital video on
the Internet to distribution of broadcast-quality video throughout the corporate
enterprise, plus comprehensive video software applications, ViewCast provides
the complete range of video communications solutions.

Our customers acquire ViewCast's video products and services to communicate
over a variety of networks for security, education, training, marketing and
sales, customer service, broadcasting, videoconferencing, financial trading, and
to reduce travel and other costs while increasing productivity. 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. Our
technologies enable users to encode and archive video content, broadcast video
over networks, deliver video from web sites, provide interactive video
communication (video conferencing), and distribute video within a network. We
operate in one business segment and market and support our products and services
either directly or through arrangements with leading OEMs, system integrators,
resellers and application developers worldwide.

Some of the statements in this Report on Form 10-Q under "Management's
Discussion and Analysis of Financial Conditions and Results Of Operations" and
elsewhere in the Report constitute forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. 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 our 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 significant losses, the effect of our accounting polices and other
risks detailed in the Annual Report on Form 10-K for the year ended December 31,
2001, as amended, Form 10-Q for the quarter ended March 31, 2002, the
Registration Statements on Form S-3 filed on April 26, 2000 and June 30, 2000
and other filings with the Securities and Exchange Commission.

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.

11

VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)

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.

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001.

NET SALES. Net sales for the three months ended June 30, 2002 increased
6.4% to $1,942,114 from $1,826,212 reported during the same period last year.
Net sales for the six months ended June 30, 2002 decreased 14.6% to $3,565,411
from $4,175,976 reported during the same period last year. The increase during
the second quarter was due primarily to increased systems sales in the financial
services sector offset in part by declining demand for Osprey products through
out the first six months of 2002 due to depressed economic conditions worldwide.

OSPREY PRODUCT SALES. During the quarter and six months ended June 30, 2002,
sales of Osprey codecs and video capture cards decreased 16.8% and 22.4%,
respectively over 2001 levels and represented 67.0% and 76.1%, respectively, of
current period revenues. On a regional basis, Osprey channel sales during the
first six months declined 39.1% and 20.7% in the U.S and Europe, respectively,
while channel sales in the Pacific Rim increased 17.3% compared to the first six
months of 2001. Overall, net Osprey revenues for the first half of 2002 were
negatively impacted by a decline in sales volumes across most product categories
due to the ongoing global economic downturn with the exception of the Osprey
210/220 series of products which have increased 72.2% compared to the first six
months of 2001 when the product was still relatively new to the marketplace.

In January 2002, ViewCast opened its new e-commerce site featuring the
Osprey streaming/capture cards as well as, Osprey SimulStream and Niagara SCX
software products. In addition to the new e-commerce offerings, the site offers
a full range of online order processing and tracking services, technical support
content and easy access to product drivers and upgrades. We believe the
e-commerce site will serve as a complement to our distribution strategy and make
it easier for our customers to purchase our products. The utilization of
e-commerce allows single unit purchases to be made quickly and easily, therefore
providing the resellers more time to deliver the personalized support necessary
for volume purchases. During the six months of 2002, e-commerce sales totaled
$168,000 and represented 6.1% of Osprey product sales.

In April 2002, ViewCast introduced its new Osprey-540 professional digital
and analog capture card designed specifically for streaming media applications
and to date has represented approximately 4.5% of Osprey product sales. Building
on the established quality and reliability of the Osprey-500 series, the
Osprey-540 further expands streaming content creation into the professional
media market and offers an array of inputs, outputs and advanced features that
allow streaming to seamlessly integrate with professional media equipment. The
Osprey-540 directly addresses the needs of professional broadcast facilities,
Fortune 1000 enterprises, entertainment studios and post-production houses. With
new product enhancements, the addition of our e-commerce strategy, and as the
economy recovers, we expect a rebound in subsystem product sales during the
third and fourth quarters of 2002.

12

VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)

VIEWPOINT VBX(TM) VIDEO DISTRIBUTION SYSTEM AND NIAGARA(R) STREAMING/
ENCODING SYSTEMS. During the quarter and six months ended June 30, 2002,
combined systems sales totaled $577,864 and $749,017 respectively, and
represented 29.8% and 21.0% of 2002 revenues, respectively. Total system sales
during the three and six months ended June 30, 2001 were $141, 997 and $489,411,
respectively and represented 7.8% and 11.7% of total 2001 revenues,
respectively. Sales of ViewCast's Niagara systems during the first six months of
2002 increased 29.3% over 2001 levels reflecting increased brand awareness of
our streaming and encoding servers. Viewpoint VBX systems sales increased 63.6%
reflecting expansion of ongoing financial services initiatives. In September
2001, ViewCast announced the sales of VBX video distribution and conferencing
systems to HSBC Bank USA through its reseller Delta Computer Group for video
distribution capabilities in HSBC's New York and New Jersey locations, as well
as connectivity to VBX systems in Europe and Hong Kong. In December 2001,
ViewCast sold VBX equipment to Siemens Information and Communications Group who
was chosen to supply a division of The Standard Bank of South Africa a fully
integrated trading solution incorporating their HiPath Product suite. VBX System
revenues from expansion and follow-on business with regard its financial
services opportunities accounted for $396,000 of revenues during the first half
of 2002 and we expect additional expansion of these opportunities in the fourth
quarter of 2002.

OTHER REVENUES. Other revenues consisting of software maintenance, training,
engineering consulting fees and professional services for the three and six
months ended June 30, 2002 amounted to $62,807 and $102,866, respectively and
represented 3.2% and 2.9% of current period revenues, respectively. Other
revenues were lower in 2002 than the $119,102 and $188,852, reported
respectively for the prior 2001 comparable periods, due to lower revenues in all
other revenue categories.

COST OF GOODS SOLD/GROSS MARGINS. Cost of goods as a percentage of sales
for the quarter ended June 30, 2002 was 44.7% compared to 41.0% during the
second quarter of last year while gross profit margins for the corresponding
periods were 55.3% and 59.0%, respectively. The increase in cost of goods sold
and declining gross margins can be attributed to the increased sales mix of VBX
system products and some Osprey products with lower margins.

Cost of goods as a percentage of sales for the six months ended June 30,
2002 was 46.9% compared to 42.6% during the same period last year while gross
profit margins for the corresponding periods were 53.1% and 57.4%, respectively.
The declining gross margin during the first half of 2002 is attributed to is
attributed to the increased sales mix of VBX systems and certain Osprey products
as described above, and to additional labor and component charges to cost of
goods sold during January and February of 2002 to implement new engineering
changes to optimize inventory mix and to meet demand for certain of its
subsystem products. We anticipate that margins will remain in the 50% - 56%
range during the balance of 2002 and will be affected quarter to quarter by
promotional activities, price adjustments, the introduction of new products and
the relative sales mix between products in any one reporting period.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses for the quarter and six months ended June 30, 2002 were
$1,190,777 and $2,579,600, respectively, a decrease of 44.5% and 42.3% from
prior year periods. The decrease reflects workforce reductions and
reorganization efforts, which began in May 2001 through June 2002 to trim
operating expenses in all product groups. During the first six months of 2002,
sales and sales support expenses decreased 58.3% over last year while finance
and administrative, customer support and marketing expenses decreased 21.4%,
27.2%, and 41.5%, respectively compared to a year ago.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for
three and six months ended June 30, 2002 totaled $778,298 and $1,654,915,
respectively, a decrease of 28.5% and 26.7% over prior year periods reflecting a
decrease in personnel due to restructuring. In addition, ViewCast incurred
significant prototype development and certification expenses associated with new
Osprey product offerings during the first half of 2001 with little comparable
expense in the first half of 2002.

13

VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)

RESTRUCTURING. During the second quarter of 2002, ViewCast continued its
Board approve plan of restructuring that included an approximate 18% reduction
in ViewCast's workforce to decrease operating expenses. Charges during the
second quarter included costs of $112,273 for employee severance. Personnel
reductions were made in our sales, marketing, development and manufacturing
departments. At June 30, 2002 we had no accrued restructuring charges.
Restructuring charges recorded during the first half of 2001 were $37,433.

OTHER INCOME (EXPENSE). Total other income for quarter and six months ended
June 30, 2002 totaled $884,163 and $668,500, respectively, and includes a
$1,071,891 gain on exchange of available-sale-securities for principal reduction
in line of credit financing arrangement, which occurred on May 6, 2002 (See Note
3 and Note 6). This gain was offset by interest expense of $195,598 and
$417,166, during the same corresponding periods.Interest expense for the three
and six month period ended June 30, 2001 was $152,039 and $257,650 respectively.
Additionally, interest income in the current periods declined over 2001 levels
reflecting reduced earnings on lower cash and cash equivalents balances compared
to 2001.

NET LOSS. Net loss for the three and six months ended June 30, 2002 was
$337,846 and $2,225,067 respectively, an 88.6% and 55.6%, improvement over the
$2,528,929 and $5,012,948 losses reported in the comparable periods in 2001
representing significantly reduced operating expenses due to ViewCast's
restructuring efforts and a $1,071,891 one-time gain on disposition of
available-for-sale securities. These efforts were offset in part by increased
interest expense, reduced sales year-to-date and declining gross margins over
2001 levels.

LIQUIDITY AND CAPITAL RESOURCES

ViewCast's primary sources of funds for conducting its business activities
are derived from sales of its products and from sales of its debt and equity
securities. ViewCast requires working capital primarily to fund operating
losses, increases in inventories and accounts receivable associated with
expected sales growth, development of its products, debt service and for capital
expenditures.

Net cash used in operating activities for the six months ended June 30,
2002 totaled $2,022,274 due principally to the reported net loss of $2,225,067
and adjustments for non-cash operating gains and expenses of 598,922. These uses
were offset by net changes in operating assets and liabilities of $801,715,
principally due to increased trade receivable collections and reductions in
inventory.

Cash generated from investing activities during the six months ended June
30, 2002 totaled $2,895,194. $2,910,641 of proceeds were generated from the sale
of securities, $8,302 proceeds were generated from the sale of fixed assets and
$23,749 was utilized to purchase fixed assets.

During the six months ended June 30, 2002, ViewCast's financing activities
utilized cash of $1,624,414 principally due the net repayment of $1,631,263 of
short-term borrowings under the terms of its asset-based lending line of credit
offset by proceeds of $10,978 received from the sale of common stock under the
terms of ViewCast's Employee Stock Purchase Plan.

In October 1998, ViewCast entered into a working capital line of credit
financing arrangement with an entity controlled by one of its principal
stockholders, who is currently Chairman of the Board. In February 2001, ViewCast
amended the facility to increase the credit line commitment from $9.0 million to
$12.0 million, extend the maturity date of the agreement to March 15, 2003, and
expand the asset base for lending to include DYTK shares owned by ViewCast. The
availability of funds under this facility is subject to certain borrowing base
limitations based principally on outstanding accounts receivable and inventory
since all DYTK shares were exchanged for reduction in note principal on May 6,
2002. At June 30, 2002, ViewCast had exceeded its borrowing base by $2.5 million
and had utilized $4.7 million of the line-of-credit facility. The noteholder has
agreed to waive through September 30, 2002 the repayment of any

14

VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)

outstanding financing that may be in excess of the borrowing base from time to
time. The facility will continue to be utilized for working capital by ViewCast
to the extent possible depending on future levels of accounts receivable and
inventory.

Effective May 6, 2002, ViewCast sold all its available-for-sale securities
comprised exclusively of 1,140,310 shares of DYTK common stock for a $2,910,641.
All proceeds were used to make a principal reduction in its line-of-credit note
balance. The price per share of DYTK stock of $2.553 was determined by
negotiations between the parties and represented a premium to the fair market
trading value of DYTK shares on May 6, 2002 of $2.00 per share. The sale
agreement also provides that ViewCast will share in 50% of any gains realized on
the stock above $4.50 per share through February 14, 2003 net of expenses. The
facility will continue to be utilized for working capital by ViewCast to the
extent possible depending on future levels of accounts receivable and inventory.
During the six months ended June 30, 2002, ViewCast borrowed $1.3 million under
the terms of the line of credit financing arrangement and after the principal
reduction of $2.9 million, resulted in a net principal note reduction of $1.6
million during the first half of 2002.

In January 2002, ViewCast extended the expiration date of its outstanding
public and public equivalent common stock purchase warrants to February 3, 2005
from February 3, 2002. Additionally, effective March 1, 2002, ViewCast decreased
the effective exercise price per share of common stock of the warrants from
$4.19 to $1.00. The warrants are redeemable by ViewCast under certain
conditions. As of June 30, 2002, there were 3,799,680 public and public
equivalent warrants outstanding. The exercise price reduction and extension of
the expiration date also applies to the issuance of up to 122,500 public
warrants upon exercise of certain representative warrants.

Pursuant to Section 8(b) of the Certificate of Designations of Series B
Convertible Preferred Stock, ViewCast was required to temporarily lower the
Series B conversion price from $3.625 per share to $0.60 per share for a period
of ninety (90) days in conjunction with the issuance of Series C Convertible
Preferred Stock in November 2001. In March 2002, holders of $1,450,000 of Series
B Convertible Preferred Stock converted their Series B shares into 2,416,666
shares of common stock at $0.60 per share.

At June 30, 2002, ViewCast had a consolidated retained earnings deficit of
$2,988,506, 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 were declared or paid during the
quarter ended June 30, 2002 and preferred dividends of $197,107, accrued during
the first quarter of 2002, were reversed during the quarter ended June 30, 2002.
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 common stock of ViewCast, at ViewCast's option. Cumulative
dividends in arrears on preferred shares are approximately: Series B-$319,123,
Series C-$86,795. Holders of Series B and Series C preferred stock have no
voting rights except as required by law.

At June 30, 2002, ViewCast had a working capital deficit of $3,331,020 and
cash and cash equivalents of $99,970. ViewCast has experienced an overall sales
decrease of 14.6% during the first half of 2002 compared to 2001 levels and,
while wary of current economic conditions, anticipates that revenues will
rebound during the balance of 2002 with the introduction of new products,
business relationships and if economic conditions improve. ViewCast plans to
improve its working capital position by increasing sales and lowering operating
expenses, by acquisitions and/or divestitures of its business segments, by
exercise of warrants and, as necessary, and by additional equity financing.
ViewCast also anticipates that losses will continue in 2002 at a lower level
than 2001, and until such time as total profit margins from the sales of its
products exceed its total development, selling, administrative and financing
costs. ViewCast will continue to monitor and restructure its workforce and
decrease operating expenses. During May 2001 through June 30, 2002, ViewCast has
reorganized its operations, reduced its workforce by 44 individuals and trimmed
other related operating expenses. As a direct result of these measures, ViewCast
has decreased selling general & administrative expenses by $1.8 million, or
42.3%, and development expenses by $604,315, or 26.7%,

15

VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)

during the first half of 2002 compared to the first half of 2001. While overall
sales have declined, net loss for the six months ended June 30, 2002 improved
34.2% over 2001 levels (excluding the effects of the $1,071,891 gain on sale of
securities). ViewCast will remain vigilant and proactive in managing its
operating expenses.

In October 1998, ViewCast entered into a working capital line of credit
financing arrangement with an entity controlled by one of its principal
stockholders, who is currently Chairman of the Board. In February 2001, ViewCast
amended the facility to increase the credit line commitment from $9.0 million to
$12.0 million, extend the maturity date of the agreement to March 15, 2003, and
expand the asset base for lending to include DYTK shares owned by ViewCast. The
availability of funds under this facility is subject to certain borrowing base
limitations based principally on outstanding accounts receivable and inventory
since all DYTK shares were exchanged for reduction in note principal on May 6,
2002. At June 30, 2002, ViewCast had exceeded its borrowing base by $2.5 million
and had utilized $4.7 million of the line-of-credit facility. The noteholder has
agreed to waive through September 30, 2002 the repayment of any outstanding
financing that may be in excess of the borrowing base from time to time. The
facility will continue to be utilized for working capital by ViewCast to the
extent possible depending on future levels of accounts receivable and inventory.

In August 2002 ViewCast announced that the United States Bankruptcy Court
in the bankruptcy case of NQL Inc. had approved the intended purchase by
ViewCast Corporation of virtually all of the assets of NQL's wholly-owned
subsidiary, Delta Computec Inc. ("DCi"). ViewCast, NQL and DCi entered into an
asset purchase agreement on May 31, 2002, pending approval from the Bankruptcy
Court. Concurrently, ViewCast and DCi entered into a Reseller Agreement to offer
ViewCast products and ancillary services to the DCi's customer base and new
prospects. DCi 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 Northeast. The integration of DCi is
expected to allow ViewCast to increase revenues and expand product channels
while complementing ViewCast's existing reseller program. DCi had reported for
the most recent fiscal year ended December 2001 gross revenues of over $13
million and positive earnings before interest, taxes, depreciation and
amortization. Since the events of September 11, there has been an increasing
interest in video network communications for providing alternatives to
traditional business travel and enhancing security applications. Combining the
video expertise of ViewCast DCi's general IT integration and video conferencing
experience offers customers a full-featured and cost-effective application
choice. Under the terms of the agreement, ViewCast will purchase virtually all
of DCi's assets, including all of its operating assets, property, contracts and
customer lists for a combination of $1 million in cash payments, issuance of
150,000 shares of unregistered redeemable, convertible preferred stock with each
share having a stated value of $10.00, and the assumption of certain liabilities
as outlined in the terms of the agreement. The preferred stock will provide for
a conversion option to common stock at $1.50 per share of ViewCast common stock.
ViewCast's purchase of the DCi's assets remains subject to various terms and
closing conditions of the asset purchase agreement. Further details regarding
DCi and the acquisition will be released following the close of the transaction,
which is expected to occur in September 2002.

ViewCast utilizes significant capital to design, develop and commercialize
its products and intends to fund its 2002 operating activities and sales growth
by utilizing cash contributed from operations and its available working capital
line of credit to the extent possible. ViewCast anticipates it will require
additional equity financing during 2002 for working capital 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 acquisition transactions. Although ViewCast has no
firm arrangements with respect to additional financing, it is currently
considering several proposals by potential investors relating to the issuance of
convertible preferred stock or other equity in exchange for a cash investment in
ViewCast. ViewCast has retained an investment-banking firm to assist in market
and strategic alternatives, including divestitures and acquisitions. There can
be no assurance that additional financing will be available to ViewCast on

16

VIEWCAST.COM, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - (CONTINUED)

acceptable terms, or at all. Additional equity financing may involve substantial
dilution to our then existing stockholders. In response to the economic slowdown
and to enhance financial performance and increase revenue, ViewCast intends to
continue actively pursuing other alternatives, including strategic merger and
acquisition activities. 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 the ViewCast's results of operations
or financial position.

At June 30, 2002, ViewCast had no material commitments for capital
expenditures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In management's opinion, there has been no material change in market risk
since disclosed in Item 7A of ViewCast's Annual Report on Form 10-K, as amended,
for the year ended December 31, 2001.

17

VIEWCAST.COM, INC. AND SUBSIDIARIES
OTHER INFORMATION

PART II: OTHER INFORMATION

Item 1. Legal Proceedings
(Not Applicable)

Item 2. Changes in Securities
(Not Applicable)

Item 3. Defaults Upon Senior Securities
(Not Applicable)

Item 4. Submission of Matters to a Vote of Security Holders
(None)

Item 5. Other Information
The Company's Chief Executive Officer and Chief Financial Officer
have furnished statements relating to its Form 10-Q for the
quarter ended June 30, 2002 pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
The statements are attached hereto as Exhibit 99.1.

Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed with this report:

(See Exhibit Index)

(b) Reports on Form 8-K

o On April 4, 2002, the Company filed a Form 8-K announcing
that its securities were not longer eligible to trade on
the Nasdaq SmallCap Market and subsequent commencement of
trading of its securities on the Over the Counter (OTC)
Bulletin Board effective with the opening of business on
April 4, 2002.

o On May 10, 2002, the Company filed a Form 8-K describing
the resignation of Ernst & Young LLP as its auditors. An
amendment was filed to this 8-K on May 20, 2002
announcing the engagement of Grant Thornton as its new
auditors.

18

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

ViewCast.com, Inc.
------------------
(Registrant)

BY:

Date: August 14, 2002 /s/ Laurie L. Latham
--------------------
Laurie L. Latham
Chief Financial Officer
Principal Financial Officer

19

EXHIBIT INDEX