UNITED STATES SECURITIES AND EXCHANGES COMMISSION
Washington D.C. 20549
-----------------------
Form 10-QSB
(Mark One)
X Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
----- Exchange Act of 1934.
For the quarterly period ended September 30, 1997 or
Transition Report pursuant to Section 13 or 15(d) of the Securities
----- Exchange Act of 1934.
For the transition period from _____ to _____
Commission file number 33-86242
ProtoSource Corporation
----------------------------------------------------
(exact name of registrant as specified in its charter)
California 77-0190772
- ------------------------------- -------------------
(State of other jurisdiction of (IRS Employer
Incorporation of organization) Identification No.)
2300 Tulare Street, Suite 210
Fresno, California 93721-2226
------------------------------------------------
(address of principal executive offices, zip code)
Registrants telephone number, including area code: (209) 490-8600
-------------------------------------------------
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
There are 665,333 shares of the registrants common stock, no par value
outstanding on September 30, 1997.
ProtoSource Corporation
Index
Page
----
Part I.
Financial Information
Item 1. Financial Statements
Condensed Balance Sheet
at September 30,1997 3
Condensed Statements of Operations
for the three months ended September 30,1997 and 1996 5
Condensed Statements of Operations
for the nine months ended September 30,1997 and 1996 6
Condensed Statements of Cash Flows
for the nine months ended September 30,1997 and 1996 7
Notes to Condensed Financial Statements 9
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II.
Other Information
Signatures 13
When used in this report, the words estimate, project, intend, believe and
expect and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risk and uncertainties that could
cause actual results to differ materially, including competitive pressures, new
product introductions by the Company and its competitors and changes in the
rates of subscriber acquisition and retention. Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release
updates or revisions to these statements.
2
ProtoSource Corporation
Balance Sheet
September 30, 1997
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 61,471
Accounts receivable 183,220
Inventories 8,980
Prepaid expenses and other 18,932
Current portion of note receivable 47,285
----------
Total current assets 319,888
----------
Property and equipment, at cost: Land 411,176
Building and improvements 1,381,816
Equipment 777,726
Furniture 110,387
Vehicles 10,090
----------
2,691,195
Less accumulated depreciation and amortization (659,141)
----------
Net property and equipment 2,032,054
----------
Other assets:
Notes Receivable, net of current portion above 723,565
Goodwill, net of accumulated amortization of $2,231 18,924
Deferred tax assets 71,550
Deposits and other assets 89,831
----------
Total other assets 903,870
----------
Total assets $3,255,812
==========
See accompanying notes
3
ProtoSource Corporation
Balance Sheet
September 30, 1997
(continued)
(unaudited)
Liabilities and shareholders' equity
Current liabilities:
Notes payable, bridge financing $ 750,000
Accounts payable 99,716
Accrued liabilities 13,929
Tenants deposits 1,500
Current portion of long-term debt 39,358
-----------
Total current liabilities 904,503
-----------
Long-term debt, net of current portion above:
Obligations under capital leases 1,851,851
Less current portion above (39,358)
-----------
Total long-term debt 1,812,493
-----------
Commitments and contingencies --
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized,
none issued and outstanding
Common stock, no par value; 10,000,000 shares authorized, --
665,333 shares issued and outstanding 5,590,455
Accumulated deficit (5,051,639)
-----------
Total shareholders' equity 538,816
-----------
Total liabilities and shareholders' equity $ 3,255,812
===========
See accompanying notes
4
ProtoSource Corporation
Statements of Operations
(unaudited)
Three months ended September 30,
--------------------------------
1997 1996
--------------------------------
Net revenues: $ 190,839 $ 166,853
--------- ---------
Operating expenses:
Cost of revenues 90,914 47,689
Sales and marketing 21,596 6,415
General and Administrative 369,124 161,550
--------- ---------
Total operating expenses 481,634 215,654
--------- ---------
Operating loss (290,795) (48,801)
Other income (expense):
Interest Income 30,559 654
Interest Expense (444,850) (48,743)
Other Income, net 48,584 20,020
--------- ---------
Loss from continuing operations before
provision for income taxes (656,502) (76,870)
Provision for income taxes -- --
--------- ---------
Loss from continuing operations (656,502) (76,870)
Loss from discontinued operations -- (23,632)
--------- ---------
Net Loss $(656,502) $(100,502)
========= =========
Net loss per share of common stock $ (1.03) $ (1.13)
========= =========
Weighted average number of common
shares outstanding 636,365 88,667
========= =========
See accompanying notes
5
ProtoSource Corporation
Statements of Operations
(unaudited)
Nine months ended September 30,
-------------------------------
1997 1996
-------------------------------
Net revenues: $ 550,969 $ 544,590
----------- -----------
Operating expenses:
Cost of revenues 207,301 156,913
Sales and marketing 50,403 47,538
General and Administrative 1,157,315 693,014
----------- -----------
Total operating expenses 1,415,019 897,465
----------- -----------
Operating loss (864,050) (352,875)
Other income (expenses):
Interest Income 104,015 825
Interest Expense (898,678) (137,012)
Other Income, net 203,429 71,280
----------- -----------
Loss from continuing operations before
provision for income taxes (1,455,284) (417,782)
Provision for income taxes -- --
----------- -----------
Loss from continuing operations (1,455,284) (417,782)
Loss from discontinued operations -- (264,200)
----------- -----------
Net Loss $(1,455,284) $ (681,982)
=========== ===========
Net loss per share of common stock $ (2.61) $ (7.69)
=========== ===========
Weighted average number of common
shares outstanding 557,897 88,667
=========== ===========
See accompanying notes
6
ProtoSource Corporation
Statements of Cash Flows
(unaudited)
Nine months ended September 30,
-------------------------------
1997 1996
-------------------------------
Cash flows from operating activities:
Net loss $(1,455,284) $ (681,982)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 173,015 268,687
Issuance of common stock for financing costs 750,000 --
Changes in operating assets:
Accounts receivable (132,667) 35,853
Inventories -- (34,229)
Deposits and other assets (4,345) (5,523)
Accounts payable (95,978) 222,036
Accrued liabilities (253,299) 371,766
Customer deposits -- 38,915
Unearned revenues -- (9,443)
----------- -----------
Net cash provided by operating activities (1,018,558) 206,080
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (33,402) (7,238)
Other assets (47,485) 1,214
Software development cost capitalized -- (442,186)
----------- -----------
Net cash (used) by investing activities (80,887) (448,210)
----------- -----------
Cash flows from financing activities:
Increase in notes payable 750,000 232,000
Issuance of common stock 970 (20,000)
Payments on notes payable (2,220) (23,529)
Payments on capital lease obligations (70,191) (82,617)
----------- -----------
Net cash provided by financing activities 678,559 105,854
----------- -----------
Net increase (decrease) in cash and cash
equivalents (420,886) (136,276)
Cash and cash equivalents at beginning of
quarter 482,357 138,646
----------- -----------
Cash and cash equivalents at end of quarter $ 61,471 $ 2,370
=========== ===========
See accompanying notes
7
ProtoSource Corporation
Statements of Cash Flows
(unaudited)
Nine months ended September 30,
-------------------------------
1997 1996
-------------------------------
Supplemental Disclosure of Cash Flow information
cash paid during the period for:
Interest $148,678 $137,012
Income taxes -- --
Supplemental Disclosure of Non cash
Investing and Financing Activities:
Acquisition of equipment under capital lease $ 69,959 $ 90,802
Capital contribution of officers -- $154,792
See accompanying notes
8
ProtoSource Corporation
Notes to Condensed Financial Statements
Basis of Presentation
The accompanying financial information of the Company is prepared in accordance
with the rules prescribed for filing condensed interim financial statements and,
accordingly, does not include all disclosures that may be necessary for complete
financial statements prepared in accordance with generally accepted accounting
principles. The disclosures presented are sufficient, in managements opinion, to
make the interim information presented not misleading. All adjustments,
consisting of normal recurring adjustments, which are necessary so as to make
the interim information not misleading, have been made. Results of operations
for the nine months ended September 30, 1997 are not necessarily indicative of
results of operations that may be expected for the year ending December 31,
1997. It is recommended that this financial information be read with the
complete financial statements included in the Companys Annual Report on Form
10-KSB for the year ended December 31, 1996 previously filed with the Securities
and Exchange Commission.
Per Share Information
Net loss per share is computed using the weighted average number of common
shares and common share equivalents outstanding during the periods presented.
Common share equivalents result from outstanding options and warrants to
purchase common stock.
9
Managements Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months Ended September 30, 1997 vs. Three Months Ended September 30, 1996
Net Sales. For three months ended September 30, 1997, net sales were
$190,839 versus $166,853 in the same period of the prior year, representing an
increase of $23,986. The increase in net sales is primarily attributed to the
implementation of several marketing initiatives and higher customer retention
rates. The Company intends to continue to increase marketing efforts and offer
diversified Internet services to increase revenues.
Gross Profit. For three months ended September 30, 1997, gross profit was
$99,925 versus $119,164 in 1996, representing a decrease of $19,239. The
decrease in gross profit resulted from higher telecommunications costs.
Management believes that the gross margin will increase as Internet services
revenue increases.
Sales and Marketing. Sales and marketing expenses were $21,596 in three
months ended September 30, 1997 versus $6,415 in 1996. The increase in sales and
marketing expenses was primarily due to the addition of a marketing manager
position and increased advertising. As the financial situation of the Company
improves, the Company intends to allocate more resources to sales and marketing
in order to increase revenues.
General and Administrative. General and administrative costs were $369,124
in the three months ended September 30, 1997 versus $161,550 in the same period
1996. The increase in general and administrative costs is primarily attributed
to expenses associated with the bridge loan financing, and increased legal and
bad debt expenses.
Operating Loss. For the three months ended September 30, 1997, the
operating loss was $290,795 compared to the 1996 same period operating loss of
$48,801. The increase in the operating loss in 1997 is primarily due to the
expenses associated with the bridge loan financing, increased legal fees and
higher telecommunications costs. To minimize the operating loss in the future,
the Company is seeking to aggressively reduce costs and increase revenues.
Interest income (expense). Net interest expense increased to $414,291 in
1997 from $48,089 in 1996. The increase in net interest expense is due to
financing expenses related to the bridge loan. Interest expense includes
financing costs of $400,000 for the issuance of 80,000 shares of company stock
as an additional cost of the bridge loan.
Other income. Net other income increased to $48,584 for the three months
ended September 30, 1997. This was due to the rental income generated by the
building as well as miscellaneous sales.
10
Results of Operations
Nine Months Ended September 30, 1997 vs. Nine Months Ended September 30, 1996
Net Sales. For the nine months ended September 30, 1997, net sales were
$550,969 versus $544,590 in the same period of the prior year, representing an
increase of $6,379. The slight increase in net sales is primarily attributed to
higher customer retention rates and increased sales.
Gross Profit. For nine months ended September 30, 1997, gross profit was
$343,668 versus $387,677 in 1996, representing a decrease of $44,009. The
decrease in gross profit is attributed to higher telecommunications costs.
Sales and Marketing. Sales and marketing expenses were $50,403 in nine
months ended September 30, 1997 versus $47,538 in 1996. The increase in sales
and marketing expenses were caused by increased advertising. The Company
believes that the sales and marketing expenses will continue to increase as the
financial situation of the Company improves.
General and Administrative. General and administrative costs increased from
$693,014 in 1996 to $1,157,315 in 1997. The increase in general and
administrative costs is primarily attributed to costs associated with the
registration of the Companys common stock issued for the private placement in
1996, 1997 bridge loan expenses, and increased legal and bad debt expenses.
Operating Loss. For the nine months ended September 30, 1997, the operating
loss was $864,050 compared to a 1996 operating loss of $352,875. The operating
loss in 1997 is attributed to the significant increases in general and
administrative expenses. Management is aggressively seeking strategies to reduce
costs and increase revenues.
Interest income (expense). Net interest expense increased in 1997 to
$794,663 from $136,187 in 1996. The increase was due to higher interest expense
related to the 1997 bridge loan. Interest expense includes financing costs of
$750,000 for the issuance of 150,000 shares of company stock as an additional
cost of the bridge loan. The interest expense is partially offset by the
interest earned on cash and short term investments.
Other income. Net other income increased to $203,429 for the nine months
ended September 30, 1997. This is due to the rental income generated by the
principal building as well as miscellaneous sales.
11
Liquidity and Capital Resources
For the nine months ended September 30, 1997, the Company used cash of
$1,018,558 for operating activities. As of September 30, 1997, the Company had a
working capital deficiency of $584,615. The working capital deficiency is
primarily attributed to the $750,000 bridge loan in 1997. The Company intends to
reduce the working capital deficiency by increasing revenue, reducing expenses
and obtaining long-term financing. There can be no assurance that the Company
will be successful in such actions in which event it may be necessary for the
Company to substantially reduce its operations.
Capital expenditures relating primarily to the purchase of computer equipment,
furniture and fixtures, and other assets amounted to $80,887 and $448,210 for
the nine months ended September 30, 1997 and 1996, respectively. In addition,
the Company acquired computer equipment through capital leases for $69,959
during the nine month period ended September 30, 1997.
Beginning in June 1997, and ending in August 1997, the Company received a total
of $750,000 in bridge loan proceeds from unrelated individuals. The net proceeds
were used for working capital, marketing expenses and to purchase capital
assets. In connection with such bridge loans, the Company issued 150,000
restricted shares of common stock, subject to demand registration and piggy back
registration rights at the Companys expense. Such shares were issued to the
individual investors at the commencement of their bridge loans. The fair value
of the common stock issued was charged to operations as an additional financing
expense for the nine months ended September 30, 1997. The cost of such
registration is expected not to exceed $100,000.
12
Part II. Other Information
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ProtoSource Corporation,
November 6, 1997 /s/ Raymond J. Meyers
------------------------------------------
Raymond J. Meyers
Chief Executive Officer