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 quarter ended March 31, 2002
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 St., Suite 210
Fresno, CA 93721
----------------
(address of principal executive offices, zip code)
Registrant's telephone number, including area code: (559) 490-8600
Indicate 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 were 5,971,103 shares of the registrant's common stock, no par value
outstanding on March 31, 2002.
ProtoSource Corporation
Index
Page
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Part I Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
as of March 31, 2002 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2002 and 2001 5
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the three months ended
March 31, 2002 and 2001 6
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2002 and 2001 7
Notes to Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II. Other Information
Other Information 16
Signatures 16
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
Condensed Consolidated Balance Sheet
March 31, 2002
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 11,253
Accounts receivable - trade, net of allowance
for doubtful accounts of $1,967 37,297
Marketable securities 169,502
Notes receivable 425,000
Prepaid expenses and other 10,479
-----------
Total current assets 653,531
-----------
Property and equipment, at cost:
Equipment 1,096,790
Furniture 101,234
Leasehold improvements 6,463
-----------
1,204,487
Less accumulated depreciation and amortization (1,100,400)
-----------
Net property and equipment 104,087
-----------
Other assets:
Goodwill 77,857
Investment in corporation 226,000
Debt issuance costs, net of amortization $23,063 253,687
Deposits 9,064
-----------
Total other assets 566,608
-----------
Total assets $ 1,324.226
===========
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
3
ProtoSource Corporation
Condensed Consolidated Balance Sheet
March 31, 2002
(Unaudited)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 218,998
Customer deposit 1,250
Accrued expenses 60,158
Deferred revenue 4,595
Notes payable 300,000
Current portion of long-term debt 16,397
------------
Total current liabilities 601,398
------------
Long-term debt, net of current portion above:
Obligations under capital leases 67,083
Less current portion above (16,397)
------------
Total long-term debt 50,686
------------
Commitments and contingencies --
Stockholders' 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, 5,971,103 shares
issued and outstanding 24,824,293
Additional paid in capital 632,745
Accumulated other compressive income (loss) (191,596)
Accumulated deficit (24,593,300)
------------
Total stockholders' equity 672,142
------------
Total liabilities and stockholders' equity $ 1,324,226
============
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
4
ProtoSource Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
Three months ended March 31,
----------------------------
2002 2001
----------- -----------
Net revenues $ 342,395 $ 403,058
----------- -----------
Operating expenses:
Cost of revenues 132,412 247,342
Sales and marketing 1,854 60,846
General and administrative 439,659 421,732
Depreciation and amortization 12,862 56,806
----------- -----------
Total operating expenses 586,787 786,726
----------- -----------
Operating loss (244,392) (383,668)
----------- -----------
Other income (expense):
Interest income 39 1,855
Interest expense (270,854) (876,135)
Loss on sale of marketable securities (65,021) --
----------- -----------
Total other income (expense) (335,836) (874,280)
----------- -----------
Loss before provision for income taxes (580,228) (1,257,948)
Provision for income taxes -- --
----------- -----------
Net Loss From Continuing Operations (580,228) (1,257,948)
----------- -----------
Discontinued Operations:
Loss from discontinued operations -- (528,112)
----------- -----------
Net Loss $ (580,228) $(1,786,060)
=========== ===========
Net Income (Loss) Per Basic and Diluted
Share of Common Stock:
Continuing operations $ (.10) $ (34)
Discontinued operations (--) (.15)
=========== ===========
Net Loss $ (.10) $ (.49)
Weighted Average Number of Basic and Diluted
Common Shares Outstanding 5,758,048 3,673,436
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
5
PROTOSOURCE CORPORATION AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
Accumulated
Common stock Additional Current Years Other
---------------------------- Paid In Comprehensive Accumulated Comprehensive
Shares Amount Capital Income (Loss) Deficit Income (Loss)
------------ ------------ ------------ ------------ ------------ ------------
Three months ended March 31, 2002:
Balance at December 31, 2001 5,671,103 $ 24,554,293 $ 392,745 $(24,013,072) $ (161,637)
Issuance of common stock in
connection with financing 300,000 270,000 -- -- --
Beneficial conversion feature of
convertible notes -- -- 240,000 -- --
Other comprehensive income (loss),
net of tax:
Unrealized (loss) on marketable
securities -- -- -- $ (94,980) -- (94,980)
Reclassification adjustment for
losses included in net loss -- -- -- 65,021 -- 65,021
Net loss -- -- -- (580,288) (580,228) --
------------
Total Comprehensive Income (Loss) -- -- -- $ (610,247) -- --
------------ ------------ ------------ ============ ------------ ------------
Balance March 31, 2002 5,971,103 $ 24,824,293 $ 632,745 $(24,593,300) $ (191,596)
============ ============ ============ ============ ============
Three months ended March 31, 2001:
Balance at December 31, 2000 3,551,636 $ 21,168,125 $ 221,325 $(13,262,972) $ --
Issuance of common stock in
connection with financing 50,050 175,000 -- -- --
Issuance of common stock in
public offering (net of
offering costs of $800,255) 1,600,000 2,799,745 -- -- --
Issuance of common stock
for payment of liabilities 21,951 35,670 -- -- --
Return of shares issued in
acquisition of Suncoast
(shares were reissued
effective May 2001) (866,988) -- -- -- --
Other comprehensive income (loss),
net of tax:
Net Loss -- -- -- $ (1,786,060) (1,786,060) --
------------
Total Comprehensive
Income (Loss) -- -- -- $ (1,786,060) -- --
------------ ------------ ------------ ============ ------------ ------------
Balance March 31, 2001 4,356,649 $ 24,178,540 $ 221,325 $(15,049,032) --
============ ============ ============ ============ ============
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements.
6
ProtoSource Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
----------------------------
2002 2001
----------- -----------
Cash flows from operating activities:
Net loss $ (580,228) $(1,786,060)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Depreciation and amortization 12,862 1,228,238
Loss on sale of marketable securities 65,021 --
Provision for bad debts 2,950 --
Amortization of debt issuance costs 23,063 --
Amortization of beneficial conversion feature of notes payable 240,000 --
Issuance of common stock for services -- 35,670
Changes in operating assets and liabilities:
Accounts receivable 482 19,609
Inventories -- 216,150
Prepaid expenses and other assets 30,735 17,592
Accounts payable 13,574 (457,603)
Customer deposits -- --
Accrued expenses 6,883 (168,586)
Deferred revenue (4,000) (2,575)
----------- -----------
Net cash (used) by operating activities (188,658) (897,565)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment -- (3,620)
Increase in note receivable (375,000) --
Deposits (500) --
Sale of investments 183,129 --
----------- -----------
Net cash (used) by investing activities (192,371) (3,620)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowing 300,000 175,000
Payments on notes payable (19,233) (1,869,030)
Offering costs incurred -- (666,653)
Debt issuance costs incurred (6,750) (22,750)
Issuance of common stock -- 3,600,000
----------- -----------
Net cash provided by financing activities 274,017 1,216,567
----------- -----------
Net increase (decrease) in cash and cash equivalents (107,012) (315,382)
Cash and cash equivalents at beginning of period 118,265 97,983
----------- -----------
Cash and cash equivalents at end of period $ 11,253 $ 413,365
=========== ===========
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
7
ProtoSource Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three months ended March 31,
----------------------------
2002 2001
---- ----
Supplemental Disclosure of Cash Flow information:
Cash paid during the period for:
Interest $ 7,790 $ 26,898
Income taxes -- --
Supplemental Disclosure of Noncash
Investing and Financing Activities:
Issuance of common stock in connection
with financing $270,000 $175,000
Unrealized loss on marketable securities 29,959 --
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
8
ProtoSource Corporation
Notes to Condensed Consolidated 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 management's 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 three months ended March 31, 2002 are not necessarily indicative of
results of operations that may be expected for the year ending December 31,
2002. It is recommended that this financial information be read with the
complete financial statements included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2001 previously filed with the Securities
and Exchange Commission.
Net Income (Loss) Per Basic and Diluted Share of Common Stock
Basic earnings per share is calculated using the weighted average number of
common shares outstanding. Diluted earnings per share is computed on the basis
of the weighted average number of common shares outstanding plus the dilutive
effect of outstanding stock options using the "treasury stock" method.
The basic and diluted earnings per share are the same since the Company had a
net loss for all periods presented and the inclusion of stock options and other
incremental shares would be antidilutive. Options and warrants to purchase
3,618,500 and 3,048,378 shares of common stock at March 31, 2002 and 2001,
respectively, were not included in the computation of diluted earnings per share
because the Company had a net loss and their effect would be antidilutive.
Sale of Suncoast Division
Effective July 1, 2001, the Company sold substantially all of the assets of
Suncoast Automation, Inc to Dauphin Technology, Inc, through Suncoast
Acquisition Corp., an Illinois corporation, for 766,058 shares of Dauphin
Technology common stock valued at stock at approximately $1,126,105 based on the
closing bid price of $1.47 per share on June 29, 2001.
The Company recorded a loss of approximately $6,786,621 on the sale of the
Suncoast Automation assets. The results of Protosource's operations for all
periods presented have been restated for the discontinued operations of
Suncoast.
9
Summary of operating results of Three Months Ended
discontinued operation: March 31,
-----------------------
2002 2001
--------- ---------
Net revenues $ -- $ 52,933
Operating expenses -- 581,012
--------- ---------
Operating (loss) -- (528,079)
Other income (expense) -- (33)
--------- ---------
Net (loss) $ -- $(528,112)
========= =========
Proposed Acquisition
In December 2001, the Company signed a term sheet with P2i, Inc. ("P2i") to
acquire 100% of P2i's outstanding common stock for 22,768,412 shares of the
Company's common stock in a tax-free exchange. In connection with the term
sheet, the Company loaned P2i $50,000 in 2001 and an additional $375,000 through
March 2002. The loans to P2i are in the form of a demand note, which in the
event the merger does not get completed will be due on demand. At the time of
signing the term sheet an officer and major shareholder of P2i was appointed as
a director of the Company.
The shares of common stock to be issued to P2i has subsequently been revised to
22,684,412 shares which will result in an ownership of 80% by the stockholders
of P2i and 20% by the current stockholders of the Company. After the acquisition
of P2i is completed, the Board of Directors of the Company will consist of two
current officers and stockholders of P2i, two independent directors to be
appointed by P2i, and one director which will be appointed by the Company's and
P2i's Investment Banker. The acquisition of P2i by the Company will be accounted
for by the purchase method of accounting as a reverse acquisition. For
accounting purposes, P2i is considered to be the acquirer and the Company is the
acquiree. The Company and P2i both used the same Investment Banker to represent
them in the transaction and each will pay the Investment Banker a fee based on
the value of the transaction using a pre-set formula. The investment banking
fees to be paid are $406,844 by the Company and $413,422 by P2i. The amounts
paid to the Investment Banker will be paid through the issuance of common stock,
which is restricted for a three year period, based on an agreed upon value of
$.50 per share at the time of signing the term sheet, or 813,688 shares for the
Company and 826,844 shares for P2i. The shares to be issued for P2i's investment
banking fees will be subtracted from the shares to be issued to the P2i
stockholders for the acquisition.
10
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standard Board ("FASB") issued SFAS No.
141, "Business Combinations", and SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting. It also
specifies the types of acquired intangible assets that are required to be
recognized and reported separately from goodwill. SFAS No. 142 requires that
goodwill and certain intangibles no longer be amortized, but instead tested for
impairment at least annually. SFAS No. 142 is required to be applied starting
with fiscal years beginning after December 15, 2001, with early application
permitted in certain circumstances. The Company adopted SFAS No. 142 on January
1, 2002 which did not result in any impairment of goodwill or other intangible
assets upon adoption.
In August 2001, the FASB issued SFAS No. 143, " Accounting for Asset Retirement
Obligations". SFAS No. 143 establishes accounting standards for recognition and
measurement of a liability for the costs of asset retirement obligations. Under
SFAS No. 143, the costs of retiring an asset will be recorded as a liability
when the retirement obligation arises, and will be amortized to expense over the
life of the asset. The Company adopted SFAS No. 143 on January 1, 2002 which did
not result in any impact on the Company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and discontinued
operations. The Company adopted SFAS No. 144 on January 1, 2002 which did not
result in any impact on the Company's financial statements.
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
Three Months ended March 31, 2002 vs. Three Months ended March 31, 2001
Net Revenues. For the three months ended March 31, 2002 net revenues from
continuing operations were $342,395 versus $403,058 in the same period of the
prior year. The decrease in revenues is attributed to a decrease in our dial-up
Internet access business and our web design and development business. The
Company believes that revenues will continue to erode as all marketing
activities have ceased in order to conserve operating funds.
Operating Expenses. For the three months ended March 31, 2002 operating
expenses from continuing operations were $586,787 versus $786,726 in the same
period of the prior year. The decrease of $199,939 is attributed to lower
network line costs, the elimination of marketing expenses and lower depreciation
and amortization expense. The Company believes that operating expenses will
continue to decline as further headcount reductions were made at the end of the
quarter.
Operating Loss. The Company's operating loss for the period ending March
31, 2002 totaled $580,228 versus $1,257,948 in 2001. The decrease of $677,720 is
due to overall lower total operating expenses and the elimination of the bridge
loans. This was partially offset by the amortization of debt issuance costs from
issuance of $300,000 in convertible debt during the quarter and a loss on the
value of the Dauphin Technology, Inc. common stock that the Company continues to
hold. The Company believes that operating losses will continue to increase as
additional convertible notes are issued to fund P2i.
Interest Income. Net interest income totaled $(270,815) for the period
ending March 31, 2002 versus net interest income of $(874,280) in 2001. The
decrease in interest expense is a result of the elimination of the amortization
of the debt issuance costs from bridge loans offset by the amortization of the
debt issuance costs from convertible debt.
Discontinued Operations. The Company sold the assets of its Suncoast
Automation subsidiary effective July 1, 2001. In connection with this sale, we
did not incur any gain or loss during from discontinued operations during this
quarter compared to a loss of $528,112 during the three months ended March 31,
2001.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations (cont'd)
Liquidity and Capital Resources
For the three months ended March 31, 2002, the Company used $188,658 of cash for
operating activities. The Company has working capital of $52,133 at March 31,
2002, which is a decrease of $340,240 from December 31, 2001. As of March 31,
2002, the Company had $11,253 in cash and cash equivalents and total liabilities
of $652,084.
On April 30, 1999, we entered into a strategic alliance with Infosis Corp., a
privately held corporation and purchased 12.7%, on a non-diluted basis, of its
outstanding common stock. We paid an aggregate of $1.8 million for 600,000
shares of Infosis Corp. common stock. At the time of the purchase, the $1.8
million payment represented 51.1% of our available cash. 30,000 of the purchased
shares were paid to Andrew, Alexander, Wise & Co., Inc., as a finder's fee.
After payment of the 30,000 shares of Infosis common stock to AAWC, we owned
570,000 shares of Infosis Corp. common stock. There were no affiliate or related
party relationships with Infosis prior to this investment. The strategic
alliance pertained to joint marketing and development activities whereby
ProtoSource would become the web design and development arm of Infosis Corp. As
part of the investment, William Conis, then a Director of ProtoSource, was
appointed to the Board of Directors of Infosis Corp. in June 1999. In June 1999,
the Board of Directors of Infosis Corp. replaced the CEO and CFO of the company.
The new management team changed the direction of Infosis Corp. and did not
follow through on the alliance with ProtoSource.
In January 2000, Infosis Corp. issued Protosource 120,000 shares of its common
stock as an adjustment to reflect a lower offering price per share in a
concluded private placement of their common stock, which brought Protosource's
holdings of Infosis Corp. to 690,000 shares. The additional shares issued were
the result of the anti-dilution provision which was part of the original
investment in Infosis Corp. The receipt of the additional shares from the
anti-dilution provision did not result in a change in the cost basis of
ProtoSource's original investment in Infosis Corp.
In July 2000, we purchased an $84,177 convertible promissory note from Infosis
Corp. in connection with a bridge financing.
In September 2000, Protosource acquired an aggregate of $329,686 principal
amount of Infosis Corp. convertible promissory notes at $0.05 on the dollar for
a total acquisition price of $16,484. These convertible promissory notes were
then converted into 329,686 shares of preferred stock of Infosis Corp.
Concurrent with the acquisition of the Infosis Corp. promissory notes by
Protosource, Infosis Corp. merged into P2i, Inc., a privately held corporation.
ProtoSource's investment in Infosis Corp. was increased by the amount that it
paid for the promissory notes which were then converted into preferred stock of
Infosis Corp. As a result of this merger, ProtoSource now owns 506,225 shares of
common stock or approximately 4% of P2i, Inc. As a result of a lack of interest
in the strategic alliance by Infosis and the merger between Infosis and P2i,
Inc., our original investment into Infosis, which merged into P2i, Inc., has
turned into a passive investment. P2i, Inc. is a privately held company and
there can be no assurances that we will realize the full value of this
investment if we need to dispose of these assets. In addition, after further
review of this investment, although no formal appraisal or valuation report was
prepared, as of December 31, 2000, we recorded an impairment expense of
$1,271,484 to write down this investment to its estimated market value. The
impairment expense was recorded as the difference between $630,000 and the total
amount of our investment into Infosis.
13
On July 17, 2001, P2i acquired all the assets of Twenty Twenty Design &
Marketing, Inc. of New York City. As a result of this acquisition, our holdings
in P2i were diluted to approximately 2.6% of the resulting entity. Additionally,
the post-merger valuation of the company was set at approximately $8.7 million.
Based on this new information, we have recorded an additional impairment expense
of $404,000 as of June 30, 2001, to write down this investment to this value.
The impairment expense was recorded as the difference between the previous value
of this investment ($630,000) and the newly established value ($226,000).
Andrew, Alexander, Wise & Co., Inc. acted as placement agent for $1,500,000 of
bridge financing completed in May 2000. The short-term financing was in the form
of units containing promissory notes with interest at 10%. In addition, each
$25,000 unit consisted of 4,000 shares of our common stock. The promissory notes
were due and paid at the closing of our February 2001 public offering. Andrew,
Alexander, Wise & Co., Inc. was paid a 10% commission and a 3% non-accountable
expense allowance. In connection with this bridge financing, we incurred debt
issuance costs of approximately $1,722,500. The unamortized debt issuance costs
were expensed as interest when the loans were repaid in February 2001.
On August 22, 2000, we acquired all the outstanding common stock of Suncoast
Automation, Inc. in exchange for 1,303,072 shares of our common stock. Although
we did not obtain an independent appraisal of the fair market value of Suncoast,
we based our valuation on the cable television industry standard at that time of
$5,000 per subscriber. On May 17, we entered into a Term Sheet to sell the
assets of Suncoast Automation to Dauphin Technology, Inc. (DNTK.OB), an Illinois
corporation. The sale was concluded effective July 1, 2001. As a result of the
sale, we received 766,058 shares of Dauphin common stock of which 38,303 were
paid to our investment banker, Andrew, Alexander, Wise and Company. Dauphin also
agreed to assume $140,269 in Suncoast liabilities. In conjunction with the sale,
we negotiated approximately $362,498 of Suncoast-related liabilities for 268,466
shares of our common stock and approximately $3,300 in cash. The write-down in
connection with this sale was recorded in the second quarter. The Dauphin
Technology stock we received was registered effective September 22, 2001. The
Company began liquidation of a portion of the securities in October 2001.
Proceeds from the sale of securities will be used to fund the Company's
operations.
In December 2000, Andrew, Alexander, Wise & Co., Inc. acted as placement agent
for a $175,000 bridge financing. The short-term financing was in the form of a
unit containing promissory notes with interest at 10%. In addition, the unit
consisted of 50,050 shares of our common stock. The promissory notes were due
and paid at the closing of the February 2001 public offering. Andrew, Alexander,
Wise & Co., Inc. was paid a 10% commission and a 3% non-accountable expense
allowance. In connection with this bridge financing, we incurred debt issuance
costs of approximately $197,750. The debt issuance costs were expensed as
interest when the loan was repaid in February 2001.
In January 2001, Andrew, Alexander, Wise & Co., Inc. acted as placement agent
for a $175,000 bridge financing. The short-term financing was in the form of a
unit containing promissory notes with interest at 10%. In addition, the unit
consisted of 50,050 shares of our common stock. The promissory notes were due
and paid at the closing of the February 2001 public offering. Andrew, Alexander,
Wise & Co., Inc. was paid a 10% commission and a 3% non-accountable expense. In
connection with this bridge financing, we incurred debt issuance costs of
approximately $197,750. The debt issuance costs were expensed as interest when
the loan was repaid in February 2001.
14
In February 2001, the Company sold 800,000 units of securities at $4.50 per unit
(the "February 2001 public offering"). Each unit consisted of two shares of
Common Stock and one redeemable Common Stock purchase warrant exercisable at
$2.92 per share until February 14, 2006. The proceeds of this offering were
significantly lower than had been expected. As a result, the bulk of the funds
from the offering were used to repay the bridge loans incurred in 2000 and early
2001 as well as past due trade payables. The remaining capital was used to fund
the operations of the Company. Thus, the Company is unable to fund the build-out
of the cable TV contracts of the Suncoast division. Thus, the sale of Suncoast
was actively sought and concluded effective July 1, 2001.
On December 14, 2001, after exploring numerous alternatives, the Company
entered into a term sheet to acquire P2i for 22,768,412 shares of our common
stock. Under the obligations of this term sheet, the Company loaned P2i $50,000
in December and an additional $375,000 during the first quarter of this year.
The loans are in the form of a demand note and will be due on demand if the
merger is not completed. Completion of the merger is subject to the approval of
the shareholders of both companies.
On December 5, 2001, the Company received notification from Nasdaq that the
Company no longer satisfied the minimum requirements for continued listing on
the Nasdaq Small Cap Market. The Company applied for an exception to the Nasdaq
listing requirements which was granted on March 12, 2002. A temporary exception
was given until April 22, 2002. It was conditioned on the Company filing a proxy
statement with the SEC by March 15, 2002, which provides our shareholders the
opportunity to approve the acquisition of P2i, as well as certain other
conditions. Due to a delay in the receipt of audited financials for P2i, the
Company was unable to meet the deadline. Subsequently, the Company's securities
were delisted from Nasdaq. The Company's securities now trade on the OTC
Bulletin Board.
In March 2002, the Company entered into an agreement with Andrew,
Alexander, Wise and Company to act as a placement agent for the sale of
convertible notes aggregating at least $300,000. The notes are secured by
certain assets of the Company and accrue interest at 10% per annum. P2i has
agreed to pay all the costs and obligations incurred with this financing. The
funding was completed during March 2002 and Andrew, Alexander, Wise & Co., Inc.
was paid a 10% commission and a 3% non-accountable expense.
On May 1, 2002, the Company entered into a conditional agreement to sell
the assets of the Fresno-based ISP business to Brand X Networks. Brand X
Networks is a privately held California-based company whose principal
shareholders were former employees of the Company. The Company agreed to lay off
the remaining employees based in Fresno on April 30th. Most terminated employees
were then hired by Brand X. Brand X will operate the ISP business for a period
of 60 days during which time they will attempt to raise sufficient funds to
acquire the assets of the ISP business from the Company. During this period, the
Company is free to solicit interest from other buyers for the business, but may
not enter into any transactions for the sale of the assets. Additionally, during
this time, Brand X will assume financial and operational responsibility for the
ISP business. At the end of the 60-day period, if Brand X does not have
sufficient funds to purchase the Company's ISP assets, the Company may, at its
option, extend the term of the agreement or sell the assets to another buyer.
15
Part II. Other Information
Item 5. Exhibits and Reports on Form 8-K
None.
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,
May 13, 2002 /s/ William Conis
------------------
William Conis,
Chief Executive Officer/
Principal Accounting Officer
16