UNITED STATES SECURITIES AND EXCHANGES COMMISSION
Washington D.C. 20549
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Form 10-QSB/A
(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
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(Exact name of registrant as specified in its charter)
California 77-0190772
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(State of other jurisdiction of (IRS Employer
Incorporation of organization) Identification No.)
2300 Tulare Street, Suite 210
Fresno, California 93721-2226
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(address of principal executive offices, zip code)
Registrants telephone number, including area code: (209) 490-8600
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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
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Property and equipment, at cost: Land 411,176
Building and improvements 1,381,816
Equipment 777,726
Furniture 110,387
Vehicles 10,090
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2,691,195
Less accumulated depreciation and amortization (659,141)
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Net property and equipment 2,032,054
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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
Debt issuance costs, net of accumulated
amortization of $160,084 687,416
----------
Total other assets 1,591,286
----------
Total assets $3,943,228
==========
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
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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
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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 (4,364,223)
-----------
Total shareholders' equity 1,226,232
-----------
Total liabilities and shareholders' equity $ 3,943,228
===========
See accompanying notes
4
ProtoSource Corporation
Statements of Operations
(unaudited)
Three months ended September 30,
--------------------------------
1997 1996
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Net revenues: $ 190,839 $ 166,853
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Operating expenses:
Cost of revenues 90,914 47,689
Sales and marketing 21,596 6,415
General and Administrative 317,124 161,550
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Total operating expenses 429,634 215,654
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Operating loss (238,795) (48,801)
Other income (expense):
Interest Income 30,559 654
Interest Expense (204,934) (48,743)
Other Income, net 48,584 20,020
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Loss from continuing operations before
provision for income taxes (364,586) (76,870)
Provision for income taxes -- --
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Loss from continuing operations (364,586) (76,870)
Loss from discontinued operations -- (23,632)
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Net Loss $(364,586) $(100,502)
========= =========
Net Loss Per Share of Common Stock:
Loss from continuing operations $ (.57) $ (.87)
Discontinued operations -- (.26)
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Net Loss $ (.57) $ (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
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Net revenues: $ 550,969 $ 544,590
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Operating expenses:
Cost of revenues 207,301 156,913
Sales and marketing 50,403 47,538
General and Administrative 1,059,815 693,014
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Total operating expenses 1,317,519 897,465
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Operating loss (766,550) (352,875)
Other income (expenses):
Interest Income 104,015 825
Interest Expense (308,762) (137,012)
Other Income, net 203,429 71,280
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Loss from continuing operations before
provision for income taxes (767,868) (417,782)
Provision for income taxes -- --
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Loss from continuing operations (767,868) (417,782)
Loss from discontinued operations -- (264,200)
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Net Loss $ (767,868) $ (681,982)
=========== ===========
Net Loss Per Share of Common Stock:
Loss from continuing operations $ (1.38) $ (4.71)
Discontinued operations -- (2.98)
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Net Loss $ (1.38) $ (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
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Cash flows from operating activities:
Net loss $ (767,868) $ (681,982)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation and amortization 173,015 268,687
Amortization of debt issuance costs 160,084 --
Changes in operating assets:
Accounts receivable (132,667) 35,853
Inventories -- (34,229)
Deposits and other assets (51,830) (5,523)
Accounts payable (95,978) 222,036
Accrued liabilities (253,299) 371,766
Customer deposits -- 38,915
Unearned revenues -- (9,443)
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Net cash provided by operating activities (968,543) 206,080
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Cash flows from investing activities:
Purchases of property and equipment (33,402) (7,238)
Other -- 1,214
Software development cost capitalized -- (442,186)
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Net cash (used) by investing activities (33,402) (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)
Debt issuance costs incurred (97,500) --
----------- -----------
Net cash provided by financing activities 581,059 105,854
----------- -----------
Net increase (decrease) in cash and cash
equivalents (420,886) (136,276)
Cash and cash equivalents at beginning of
period 482,357 138,646
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Cash and cash equivalents at end of period $ 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 by officers through
forgiveness of previously accrued salaries -- $154,792
Issuance of common stock in connection
with financing 750,000 --
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.
Restatement of Financial Information
The Company has restated its financial statements for the nine months ended
September 30, 1997 to capitalize the debt issuance costs incurred in connection
with its Bridge Loan financing. The Company had originally expensed the debt
issuance costs as additional interest expense.
In connection with the Bridge Loan, the Company agreed to issue one share of
common stock for each $5 loaned to the Company. The fair market value of the
common stock ($750,000) and the commission paid on the Bridge Loan ($97,500) are
capitalized as debt issuance costs and are being amortized over the 15 month
loan as interest expense.
In the opinion of management, all material adjustments necessary to correct the
financial statements have been recorded. The impact of these adjustments on the
company's financial results as originally reported is summarized below:
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
-------------------------- --------------------------
As reported As restated As reported As restated
Operating expense $ 481,634 $ 429,634 $ 1,415,019 $ 1,317,519
Interest expense 444,850 204,934 898,678 308,762
Net (loss) (656,502) (364,586) (1,455,284) (767,868)
Net (loss) per share (1.03) (.57) (2.61) (1.38)
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 for the
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 expenses were
$317,924 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 Company's May 1997 Registration
Statement covering the May 1997 Securities including legal and accounting fees.
The Company also incurred $10,372 of bad debts during the three months ended
September 30, 1997.
Operating Loss. For the three months ended September 30, 1997, the
operating loss was $238,795 compared to an operating loss of $48,801 in the same
period of 1996. The increase in the operating loss in 1997 is primarily due to
the expenses associated with the May 1997 Registration Statement, increased
legal fees and higher telecommunications costs. The Company will seek to reduce
general and administrative costs by renegotiating or cancelling its Shaw Avenue
capital lease and its Visella, California lease.
Interest Expense. Net interest expense increased to $174,375 for the three
months ended September 30, 1997 from $48,089 in the same period of 1996, as a
result of amortization of the Bridge Loan debt issuance costs and accrued
interest on the Bridge Loans. The interest expense was somewhat offset by the
interest earned on cash and short term investments.
Other income. Net other income increased to $48,584 for the three months
ended September 30, 1997 as a result of rental income generated by the Company's
office building as well as miscellaneous sales. Total rental income recognized
was $36,000 all of which was paid in December 1997.
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 for the 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 sales and marketing expenses will continue to increase if funds
are available to the Company to promote its products and services.
General and Administrative. General and administrative expenses increased
from $693,014 in 1996 to $1,059,815 in 1997. The increase in general and
administrative costs is primarily attributed to costs associated with the
Company's May 1997 Registration Statement covering the May 1997 Securities
including $77,971 of legal and accounting fees. The Company also incurred
$10,372 of bad debts during the nine months ended September 30, 1997.
Operating Loss. For the nine months ended September 30, 1997, the operating
loss was $766,550 compared to an operating loss of $352,875 in the same period
of 1996. The operating loss in 1997 is attributed to the significant increases
in general and administrative expenses described above. The Company will seek to
reduce general and administrative costs by renegotiating or cancelling its Shaw
Avenue Capital lease and its Visella, California lease.
Interest Expense. Net interest expense increased to $204,747 for the nine
months ended September 30, 1997 from $136,187 in the same period of 1996, as a
result of amortization of the Bridge Loan debt issuance costs and accrued
interest on the Bridge Loans. The increase was due to higher interest expense
related to the 1997 bridge loan. The interest expense was somewhat 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 as a result of rental income generated by the Company's
office building as well as miscellaneous sales. Total rental income recognized
was $108,000 and the total amount collected was $48,000. (The balance of the
outstanding rent was paid in December 1997).
11
Liquidity and Capital Resources
For the nine months ended September 30, 1997, the Company used cash of $968,543
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 $33,402 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 Compan's expense. Such shares were issued to the
individual investors at the commencement of their bridge loans. The fair market
value of the common stock ($750,000) and the commission paid on the Bridge Loan
($97,500) are capitalized as debt issuance costs and are being amortized over
the 15 month loan as interest expense.
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,
April 14, 1998 /s/ Raymond J. Meyers
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Raymond J. Meyers
Chief Executive Officer