QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT TO THE 1934 ACT REPORTING
REQUIREMENTS
Form 10-QSB
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2007
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-25594
PROTOSOURCE CORPORATION
-----------------------
(Exact name of registrant as specified in its charter)
California 77-0190772
(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
One Bethlehem Plaza, 4th Floor, Bethlehem, PA 18018
---------------------------------------------------
(Address of Principal Executive Offices, Zip code)
610-332-2893
------------
(Issuers' Telephone Number)
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 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
There were 9,927,329 shares of the registrant's common stock, no par value,
outstanding as of March 31, 2007.
PROTOSOURCE CORPORATION
-----------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
MARCH 31, 2007
- --------------------------------------------------------------------------------
INDEX
-----
Part I - Financial Information (unaudited):
Item 1. Condensed consolidated balance sheet -
March 31, 2007 3
Condensed consolidated statement of operations for the
three-month periods ended
March 31, 2007 and 2006 4
Condensed consolidated statement of stockholders'
deficiency for the three-month period ended March 31, 2007 5
Condensed consolidated statement of cash flows for the
three-month periods ended March 31, 2007 and 2006 6 & 7
Notes to condensed consolidated financial statements
for the three-month period ended March 31, 2007 8 to 13
Item 2. Management's discussion and analysis or
plan of operations 14 to 17
Item 3. Controls and procedures 17
Part II - Other Information
Other Information 18
Signature and certifications 19
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 and
new product or service introductions by the Company and its competitors. 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.
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PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 40,417
Accounts receivable, net of allowance of $15,892 328,000
Advances to officers, net of obligations to officers 58,126
Prepaid expenses and other 1,503
------------
Total current assets 428,046
------------
Property and equipment, at cost, net of
accumulated depreciation and amortization of $511,030 64,508
------------
Other assets:
Amounts due from related party - P2i, Inc. 214,715
Goodwill - Acquisition of P2i Newspaper 375,067
Deposits 7,774
------------
Total other assets 597,556
------------
Total assets $ 1,090,110
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable $ 2,425,000
Current portion of obligations under capital leases 22,119
Accounts payable 80,875
Accrued interest 1,223,704
Accrued expenses 400,966
------------
Total current liabilities 4,152,664
------------
Obligations under capital leases, non-current portion 4,114
Stock subscriptions payable 661,844
------------
Total non-current liabilities 665,958
------------
Stockholders' deficiency:
Preferred stock, Series B, no par value; 5,000,000 shares
authorized, 193,836 shares issued and outstanding 416,179
Common stock, no par value; 10,000,000 shares
authorized, 9,927,329 shares issued and outstanding 26,143,461
Additional paid-in capital 2,291,607
Accumulated other comprehensive income 47,482
Accumulated deficit (32,627,241)
------------
Net stockholders' deficiency (3,728,512)
------------
Total liabilities and net stockholders' deficiency $ 1,090,110
============
See accompanying notes.
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PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
- -----------------------------------------------------------------------------------
THREE-MONTH
PERIOD ENDED
MARCH 31,
2007 2006
------------ ------------
Net revenues $ 659,314 $ 590,390
------------ ------------
Operating costs and expenses:
Cost of revenues 395,258 320,377
Selling, general and administrative 225,159 188,475
Depreciation and amortization 11,002 5,924
Loss on disposal of property and equipment -- 21,826
------------ ------------
Total operating costs and expenses 631,419 536,602
------------ ------------
Operating income 27,895 53,788
------------ ------------
Other income (charges):
Other income -- 7,441
Interest expense (93,398) (86,355)
Other expense (991) (280)
------------ ------------
Net other (charges) (94,389) (79,194)
------------ ------------
Net loss ($ 66,494) ($ 25,406)
============ ============
Net loss per basic and diluted share of common stock ($ -- ) ($ -- )
============ ============
Weighted average number of basic and diluted
common shares outstanding 32,874,548 32,874,548
============ ============
See accompanying notes.
- - 4 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2007
(unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Preferred Stock Common Stock Additional Other
------------------- ----------------------- Paid-In Comprehensive Accumulated Comprehensive
Shares Amount Shares Amount Capital Income Deficit Total (Loss)
------- -------- --------- ----------- ----------- ------- ---------- ----------- -------
Balance,
December 31, 2006 193,836 $416,179 8,114,829 $26,143,461 $ 2,291,607 $43,532 ($32,560,747) ($3,665,968)
Net loss
(66,494) (66,494) ($66,494)
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustments 3,950 3,950 3,950
------- -------- --------- ----------- ----------- ------- ------------ ----------- --------
Total
comprehensive
(loss) ($62,544)
========
Balance,
March 31, 2007 193,836 $416,179 9,927,329 $26,143,461 $ 2,291,607 $47,482 ($32,627,241) ($3,728,512)
======= ======== ========= =========== =========== ======= ============ ===========
See accompanying notes.
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PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
- --------------------------------------------------------------------------------
THREE-MONTH PERIOD
ENDED
MARCH 31,
2007 2006
--------- ---------
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss ($ 66,494) ($ 25,406)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 11,002 5,924
Loss on disposal of property and equipment -- 21,826
Changes in operating assets and liabilities:
Accounts receivable 19,339 (45,988)
Prepaid expenses and other assets (620) (717)
Accounts payable 27,370 (1,835)
Accrued expenses 83,199 121,681
--------- ---------
Net cash provided by operating activities 73,796 75,485
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (4,123) (18,550)
(Increase) in amount due from related company (22,471) (20,800)
(Increase) in advances to officers (9,035) (26,826)
--------- ---------
Net cash (used in) investing activities (35,629) (66,176)
--------- ---------
Cash flows from financing activities:
Payments on obligations under capital leases (6,542) (9,751)
--------- ---------
Net cash (used in) financing activities (6,542) (9,751)
--------- ---------
Net increase (decrease) in cash before effect of
exchange rate changes on cash 31,625 (442)
Effect of exchange rate changes on cash 3,950 --
--------- ---------
Net increase (decrease) in cash 35,575 (442)
Cash at beginning of period 4,842 40,812
--------- ---------
Cash at end of period $ 40,417 $ 40,370
========= =========
CONTINUED ON NEXT PAGE
See accompanying notes.
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PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
THREE-MONTH PERIOD
ENDED
MARCH 31,
2007 2006
---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 3,680 $ 5,141
---------- ----------
Income taxes $ -- $ --
---------- ----------
See accompanying notes.
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PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2007
(unaudited)
- --------------------------------------------------------------------------------
1. Nature of Operations and Summary of Significant Accounting Policies
-------------------------------------------------------------------
Nature of operations - ProtoSource Corporation, formerly SHR Corporation
doing business as Software Solutions Company (the Company), was
incorporated on July 1, 1988, under the laws of the state of California.
Until May 1, 2002, the Company was an Internet service provider (ISP). The
Company provided dial-up Internet access, web hosting services and web
development services. The Company entered into an agreement on May 1, 2002
to sell substantially all of the assets pertaining to the ISP to Brand X
Networks, Inc. (see Note 3). Effective January 1, 2004, the Company
acquired P2i Newspaper, LLC. (see Note 4). P2i Newspaper is principally
engaged in the conversion of text and graphics from print to interactive
Web content. Its clients include newspaper groups located in the United
States and the United Kingdom. P2i Newspaper is headquartered in Bethlehem,
Pennsylvania and has a data conversion center located in Kuala Lumpur,
Malaysia.
Basis of presentation - The accompanying unaudited condensed consolidated
financial statements of the Company are prepared in conformity 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, 2007 are not necessarily indicative of the results expected
for the full fiscal year or for any future period. 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, 2006 previously filed with the Securities and Exchange
Commission. The accompanying condensed consolidated financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or the amount and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flows to meet its obligations on a timely basis, to obtain
additional financing as may be required, and to generate revenues to a
level where the Company becomes profitable. These measures are imperative,
as the Company has experienced extreme cash liquidity shortfalls from
operations.
The Company's continued existence is dependent upon its ability to achieve
its operating plan. Management's plans include the following:
o Obtaining additional working capital through the sale of common
stock or debt securities.
o The ability of P2i Newspaper to successfully implement its
strategic plan as follows:
P2i Newspaper's long-term business strategy is to focus on the
processing of print content into Web content using technologically
sophisticated, database-driven, services and solutions across multiple
business-to-business verticals. The combination of on-target sales
strategies, low labor costs, a well-educated labor pool fluent in
English, and sophisticated technologies (the Company's core
competencies) make P2i Newspaper highly competitive. P2i Newspaper is
focused on increasing its market share in the newspaper vertical while
targeting magazines, retailers and government offices verticals. The
Company intends to leverage its competitive advantages, which include
its technology, labor and customer base resources, in these markets
over the next five years and will continue to add services that are
synergistic with its core competencies.
- - 8 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2007
(unaudited)
- --------------------------------------------------------------------------------
1. Nature of Operations and Summary of Significant Accounting Policies -
Continued
---------------------------------------------------------------------
The primary business is to mine, manage and database print content for the
publishing industry, and its distribution via the Internet. Each day, 52
weeks a year, electronic files can be received from the Company's clients.
Once received, these are to be processed overnight for delivery the
following morning. Data is deliverable not only to the Company's web
servers for seamless integration into clients' existing, hosted web sites,
but can also be distributed back to clients and to their business partners
in a wide range of formats to fit their ever evolving needs.
Services comprise the following:
Hosted Solutions -- Publishers large and small may use the Company's array
of customizable, turnkey, hosted products for entire publications, sections
and vertical-specific solutions. Utilizing proprietary technology, the
Company converts print content comprising editorial and media ads into
interactive, online content that is seamlessly incorporated into existing
newspaper/publisher web sites. At the end of every business day, publishing
clients transmit to the Company the same electronic versions of ads and
pages that go to press. These files are received by the Company's
production group, processed, quality checked, and delivered to the hosting
servers by the start of the following business day.
Data Extraction -- Customers utilizing in-house or third party solutions
may rely upon the Company's ability to database incoming content down to
the minutest subset. The Company has solutions that will convert multiple
forms of disparate electronic content and process them into one constant
data flow as one of its specialties. Extracting relevant data points,
merging consistencies and fielding content to produce a data feed, per the
client's or third party's specifications, is at the core of the Company's
technology. The ensuing data enables tight search functions and powers
retail advertising web sites.
Content Review - Because online content needs to reflect the values,
relevance and accuracy that print institutions have embodied for centuries,
the Company's Content Review team functions to examine thousands of items a
day for retailers and newspapers, editing, proofing and determining
relevancy. The staff reviews pricing, language, brand names, and scores of
other specifics, delivering a critical component in the online publishing
of user-generated content.
Technical Support -- The Company has also launched a poly-lingual Technical
Support team. Unlike a traditional call center that scripts its responses,
this functional group separates itself from the competition by providing a
highly trained, technically skilled support person that is trained to
understand the idiosyncrasies of customers' products and services to ensure
each caller gets the best possible service.
If management cannot sufficiently execute and achieve the above stated
objectives, the Company may find it necessary to dispose of assets, or
undertake other actions as may be appropriate.
- - 9 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2007
(unaudited)
- --------------------------------------------------------------------------------
1. Nature of Operations and Summary of Significant Accounting Policies -
Continued
---------------------------------------------------------------------
Net (loss) per basic and diluted share of common stock - Basic loss per
share is calculated using the weighted average number of common shares
outstanding. Diluted loss per share is computed on the basis of the
weighted average number of common shares outstanding during the period
increased by the dilutive effect of outstanding stock options using the
"treasury stock" method. The weighted average number of basic and diluted
common shares outstanding includes:
Actual shares issued and outstanding at March 31, 2007 9,927,329
Stock subscriptions payable - note holders 2,750,000
Stock subscriptions payable - investment banker 813,688
Series B convertible preferred stock issued to P2i, Inc. (see Note 4) 19,383,531
----------
32,874,548
==========
The basic and diluted loss per share are the same since the Company had a
net loss for 2007 and 2006 and the inclusion of stock options and other
incremental shares would be anti-dilutive. Options and warrants to purchase
1,070,000 and 1,185,000 shares of common stock at March, 31 2007 and 2006,
respectively, were not included in the computation of diluted loss per
share.
Reclassifications - Certain reclassifications have been made to the 2006
financial statement presentation for comparability with the 2007 financial
statements.
- - 10 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2007
(unaudited)
- --------------------------------------------------------------------------------
2. Recently Issued Accounting Standards
------------------------------------
In July 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty in
Income Taxes - An Interpretation of SFAS No. 109". FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with SFAS No. 109, "Accounting for
Income Taxes." FIN No. 48 also prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. In
addition, FIN No. 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. The provisions of FIN No. 48 are to be applied to all tax
positions upon initial adoption of this standard. Only tax positions that
meet the more-likely-than-not recognition threshold at the effective date
may be recognized or continue to be recognized as an adjustment to the
opening balance of accumulated deficit (or other appropriate components of
equity) for that fiscal year. The provisions of FIN No. 48 are effective
for fiscal years beginning after December 15, 2006. The adoption of FIN 48
is not expected to have a material impact on our financial position,
results of operations, or cash flows.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulleting ("SAB") 108, to address diversity in practice in
quantifying financial statement misstatements. SAB 108 requires that the
Company quantify misstatements based on their impact on each of its
financial statements and related disclosures. SAB 108 is effective for
fiscal years ending after November 15, 2006. The Company has adopted SAB
108 effective as of December 31, 2006. The adoption of this bulletin did
not have a material impact on our financial position, results of
operations, or cash flows.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements".
SFAS No. 157 provides guidance for using fair value to measure assets and
liabilities. It also responds to investors' requests for expanded
information about the extent to which companies measure assets and
liabilities at fair value, the information used to measure fair value, and
the effect of fair value measurements on earnings. SFAS No. 157 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value, and does not expand the use of fair value in any
new circumstances. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and is required
to be adopted by the Company in the first quarter of 2008. The Company is
currently evaluating the effect that the adoption of SFAS No. 157 will have
on our financial position, results of operations, or cash flows.
3. Sale of ISP Division
--------------------
Effective May 1, 2002, the Company entered into an agreement to sell
substantially all of the assets of the ISP division to Brand X Networks,
Inc., a California Corporation, for $632,000. The assets have been held and
operated by Brand X Networks, Inc. for its purposes since May 1, 2002, at
which time the Company discontinued its ISP operations. On April 14, 2003,
the Company completed a fifth amendment to the purchase agreement with
Brand X pursuant to which the Company agreed to accept an aggregate payment
of $632,000 for the ISP Division, less credits to Brand X of $112,686. Of
such amount, $200,000 was to be paid through the provision of services to
the Company from Brand X. And the balance was to be paid at the rate of
approximately $5,172 per month, until completely paid.
- - 11 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2007
(unaudited)
- --------------------------------------------------------------------------------
3. Sale of ISP Division - Continued
--------------------------------
On January 1, 2004, the sale of the ISP business to Brand X closed. Under
the terms of that agreement a promissory note of $284,455 was executed by
Brand X to be paid in 55 equal monthly installments. This note is
collateralized by a pledge of shares in Brand X. In addition, ProtoSource
was entitled to appoint one person to the board of directors of Brand X for
the duration of the agreement.
In February 2006, still within terms of the purchase agreement, Brand X
notified ProtoSource that it would be unable to make its next payment on
its note payable obligation and could not then specify when the next
payment(s) would be forthcoming. Subsequently, ProtoSource discovered that
Brand X had become insolvent and was unable to meet its obligations to
ProtoSource and, as a consequence, was unable to cure its default status on
its note payable obligation and, therefore, of the purchase agreement
itself. At December 31, 2005, ProtoSource assessed the collectibility of
the remaining note receivable balance of $162,582 and its unused services
credit balance of $151,308 and determined that collection or realization of
any portion of these amounts was highly doubtful and their values should be
written down to $0. As a consequence, the Company recorded a provision for
Brand X's uncollectible note and services credit in the amount of $313,890
in 2005.
In an agreement dated March 2006, ProtoSource sold, assigned and
transferred the promissory note it held in respect of the January 2004 sale
of its ISP business to Brand X Networks, Inc. to P2i, Inc., a related
party. As set forth in this transaction, a new promissory note, secured by
all the assets of Brand X Networks, Inc., was issued to P2i, Inc. in the
net amount of $162,582. The principal with interest shall be paid in 33
equal monthly installments of $5,172, until completely paid. Because
regular payments have not been made, this successor note is in default
status and has been fully reserved. During the whole of 2006, ProtoSource
recovered $13,800 from the P2i, Inc. / Brand X Networks, Inc. promissory
note arrangement. As the value of this note was written down to $0 at
December 31, 2005, these payments were classified as "other income" in
2006.
4. P2i Newspaper
-------------
On February 13, 2003, the Company announced an agreement and Plan of Merger
to acquire all of the outstanding capital stock of P2i Newspaper, Inc., a
Delaware corporation ("P2i Newspaper") and a wholly-owned subsidiary of
P2i, Inc., a Pennsylvania corporation ("P2i"), in exchange for the issuance
of up to 19,383,531 shares of ProtoSource common stock and satisfaction of
the existing P2i debt to the Company (the "Agreement").
On January 1, 2004, the Company, P2i Newspaper and P2i amended the terms of
the Agreement (the "Amendment"). Pursuant to the terms of the Amendment, in
exchange for all of the issued and outstanding shares of P2i Newspaper, the
Company issued 193,836 shares of series B preferred stock (the "Preferred
Stock").
Upon authorization of sufficient shares of common stock, holders of the
Series B Convertible Preferred Stock ("Series B Stock") are entitled to
convert each share of Series B Stock into 100 shares of common stock.
Series B stockholders are not entitled to receive dividends. In a
liquidation, the holders would be treated as if they were owners of the
number of shares of common stock into which the Series B Stock is
convertible.
- - 12 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2007
(unaudited)
- --------------------------------------------------------------------------------
4. P2i Newspaper - Continued
-------------------------
The acquisition of P2i Newspaper became effective on January 1, 2004, at
which time P2i Newspaper became a wholly-owned subsidiary of the Company.
The cost was as follows:
Market value of preferred stock to be issued $416,179
Fair market value of net assets of P2i Newspaper 41,112
--------
Goodwill $375,067
========
The acquisition of P2i Newspaper was the central component of the
transaction between the Company and P2i; however, in further accordance to
the agreement, as a consideration for the satisfaction of P2i's existing
debt to the Company (i.e., $1,705,062 in notes receivable plus accrued
interest), the Company acquired an additional interest in P2i's new media
business, bringing the Company's total ownership in P2i to 19.8%. However,
despite the increased ownership of P2i, the ownership in P2i is considered
to be of deminimus value and therefore has no classification within the
Company's financial statements.
- - 13 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
Certain statements in this section and elsewhere in this quarterly report on
Form 10-QSB are forward-looking in nature and relate to the Company's plans,
objectives, estimates and goals. Words such as "expects," "anticipates,"
"intends," "plans," "projects," "forecasts," "believes," and "estimates," and
variations of such words and similar expressions, identify such forward-looking
statements. Such statements are made pursuant to the safe harbor provisions of
the private securities litigation reform act of 1995 and speak only as of the
date of this report. The statements are based on current expectations, are
inherently uncertain, are subject to risks and uncertainties and should be
viewed with caution. Actual results and experience may differ materially from
those expressed or implied by the forward-looking statements as a result of many
factors, including, without limitation, those set forth under "Description of
Business" in the Company's most recent Annual Report on Form 10-KSB. The Company
makes no commitment to update any forward-looking statement or to disclose any
facts, events, or circumstances after the date hereof that may affect the
accuracy of any forward-looking statement.
Results of Operations
- ---------------------
Three Months ended March 31, 2007 vs. Three Months ended March 31, 2006
Net Revenues - For the three months ended March 31, 2007 and 2006, net revenues
were $659,314 and $590,390 respectively. All revenues of the Company are
attributed to the operations of P2i Newspaper, LLC. acquired January 1, 2004.
The $68,924 increase in revenues over the previous year is largely attributable
to two areas: 1.) A sales effort that has focused on media companies within the
newspaper vertical that have a demand for the conversion of large volumes and
2.) The development of new revenue streams from new service offerings that
include content verification and call center support services.
Operating Costs And Expenses - For the three months ended March 31, 2007,
operating costs and expenses totaled $631,419 versus $536,602 in 2006. Higher
production expenditures necessary to meet the approximately 12% increase in
revenues accounted for much of the increase in operating costs and expenses, but
cost of revenues as a percentage of revenues rose about 6% over its level in
2006. This was due to a combination of factors: An unfavorable change in the
Malaysian Ringgit exchange rate, expansion of plant facility overhead to meet
existing and future anticipated rises in production volumes and new low-margin
service capabilities. In addition to these changes, an expanded production staff
to meet volumes not fully realized had been maintained and residual severance
costs related to the termination of P2i Online's former general manager had been
recorded.
For the three months ended March 31, 2007, general and administrative expenses
increased approximately $37,000 over the previous year due to the following
significant expenditure components: A provision for about $19,000 of advances to
be recognized as officers' compensation was recorded, approximately $11,000 more
in sales development efforts were incurred, and approximately $7,000 more in
travel and employee related costs were realized this period over the same period
in 2006. In 2006, operating costs and expenses included a $21,826 loss on
disposal of computer equipment. {Administrative costs principally consist of the
Company's management office and personnel, professional fees associated with
maintenance of the Company, and officers' and directors' liability insurance
costs.}
Interest Expense - Interest expense totaled $93,398 for the three-month period
ended March 31, 2007 versus $86,355 in the same period in 2006. The interest
expense is a result of the convertible notes obtained during 2002, 2003, and
2004 to fund the operations of the Company and P2i Newspaper, pending and post
merger.
- - 14 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
- -------------------------------
We assess liquidity by our ability to generate cash to fund our operations.
Significant factors that affect the management of our liquidity include: current
balances of cash, expected cash flows provided by operations, current levels of
our accounts receivable and accounts payable balances, access to financing
sources and our expected investment in equipment.
The Company experienced positive cash flows from operating activities for each
of the three-month periods ending March 31, 2007 and 2006.
Even though the Company's net loss for the three-month period ended March 31,
2007 was approximately $66,000, cash flows provided by operations approximated
$74,000. In part, this was due to non-cash charges of approximately $11,000 of
depreciation and amortization included in the net loss. Additionally, cash flows
from operations were enhanced approximately $129,000 by net positive changes in
the Company's working capital components. Significant components enhancing
working capital and available cash - because they were accrued but unpaid during
the period -- were as follows: Approximately $90,000 of accrued interest arising
from the Company's convertible debt obligations, approximately $27,000 of
accrued supplier and service provider obligations, and approximately $19,000
reduction in outstanding accounts receivable levels over that at the beginning
of the year. These positive contributing factors of working capital and
available cash were slightly offset by an approximately $7,000 reduction in
levels of accrued compensation.
During the three-month period ended March 31, 2007, the Company had negative
cash flows from investing activities of approximately $36,000. This consisted of
approximately $4,000 for acquisitions of new equipment, approximately $9,000 of
advances to directors and officers, and approximately $23,000 of cash advanced
to a related company.
And during the three-month period ended March 31, 2007, the Company used,
through its financing activities, approximately $7,000 of funds for payments on
capital lease obligations.
As of March 31, 2007, the Company had $40,417 in cash and $387,629 in accounts
receivable and other current assets. Taken together with $4,152,664 of total
current liabilities, this resulted in a negative working capital position of
$3,724,618 at March 31, 2007. $3,648,704 of this amount pertains to the
Company's obligations to its convertible debt holders.
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PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources - Continued
- -------------------------------------------
During 2002, the Company entered into an agreement with AAWC to act as a
placement agent for the sale of convertible notes aggregating $1,300,000. The
notes are secured by stock in P2i Newspaper, Inc. and accrue interest at 10% per
annum. The Company pays the cost and obligations of the first $200,000 incurred
with this financing and P2i Newspaper, Inc. has agreed to pay all remaining
costs and obligations. Through December 31, 2003, $1,225,000 in funding had been
completed. AAWC was paid a 10% commission and a 3% non-accountable expense.
Substantially all of the proceeds from these notes have been loaned to P2i,
Newspaper Inc. The loans were in the form of demand notes accruing interest at
8% per annum. These loans, with their related interest receivable, were written
off in 2003.
During May 2003, the Company entered into an agreement with Carl R. Butera for
the sale of a convertible note aggregating $200,000. The note is secured by
stock in P2i Newspaper, Inc. and accrues interest at 10% per annum.
Substantially all of the proceeds from this note have been loaned to P2i
Newspaper, Inc. The loans were in the form of demand notes accruing interest at
8% per annum. These loans, with their related interest receivable, were written
off in 2003.
During the twelve-month period ended December 31, 2003, the Company entered into
certain agreements with AAWC to act as a placement agent for the sale of
convertible notes aggregating $700,000. The notes are secured by stock in P2i
and accrue interest at 10% per annum. P2i has agreed to pay the related costs
and obligations. Through December 31, 2003, $600,000 in funding had been
completed; an additional $100,000 was completed during January 2004. AAWC was
paid a 10% commission and a 3% non-accountable expense. Substantially all of the
proceeds from these notes have been loaned to P2i Newspaper, Inc. The loans were
in the form of demand notes accruing interest at 8% per annum. These loans, with
their related interest receivable, were written off in 2003.
During 2004, the Company entered into certain agreements with AAWC to act as a
placement agent for the sale of convertible notes aggregating $500,000, of which
$300,000 was raised during the first and second quarters of 2004. These notes
accrue interest at 10% per annum. AAWC was paid a 10% commission and a 3%
non-accountable expense. These notes, and all other notes, are secured by the
assets of ProtoSource and P2i Newspaper.
On October 15, 2005, the Company entered into a 24-month term capital lease
agreement with Bankers Capital for the purchase of computer and computer related
items valued at $27,767 with monthly lease payments of $1,596 each. The lease
term expires September 14, 2007 and the residual maturity date is October 15,
2007 with a $1.00 purchase option. $3,487 was paid to Bankers Capital at the
start of the lease to cover the first payment, one payment held for a security
deposit, and for UCC filing and documentation fees. Company officers, Peter A.
Wardle and Thomas C. Butera, are personal guarantors of this agreement.
On July 15, 2006, the Company entered into a 24-month term capital lease
agreement with Bankers Capital for the purchase of computer and computer related
items valued at $26,827 with monthly lease payments of $1,521 each. The lease
term expires June 14, 2008 and the residual maturity date is July 15, 2008 with
a $1.00 purchase option. $3,438 was paid to Bankers Capital at the start of the
lease to cover the first payment, one payment held for a security deposit, and
for UCC filing and documentation fees. Company officers, Peter A. Wardle and
Thomas C. Butera, are personal guarantors of this agreement.
- - 16 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
- ------------------------------------------
Management's discussion and analysis of its financial position and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses and related disclosure of contingent
assets and liabilities. The significant accounting policies which we believe are
the most critical to aid in fully understanding and evaluating our reported
financial results include the following:
In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company
maintains a valuation allowance of $5,400,000 as of December 31, 2006 on
deferred tax assets relating to its net operating losses which the Company has
not determined to be more likely than not realizable.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets",
goodwill is not amortized, rather, management tests goodwill annually for
impairment in the fourth quarter.
The Company considers certain trade accounts receivable to be of doubtful
collection; accordingly, the Company has a $15,892 allowance for doubtful
accounts. The Company considers the balances of its note receivable of $162,582
and its unused services credit of $151,308 as uncollectible or unrealizable;
accordingly, a $313,890 allowance for doubtful accounts was recorded in 2005.
In consideration of SEC Proposed Rule Release 33-8098, the Company does not
maintain estimates for sales returns or credits, cancellations and warranties.
Due to the peculiar nature of the type of services provided and the underlying
processes employed by the Company to create and deliver completed product
(without defect) to its customers, there is no material exposure to what would
be classified as sales returns or credits. Likewise, cancellations and or
warranties are not significantly measurable in respect to the type of electronic
product (internet Website content) deliverable to the Company's customers; and
historically, there has been no basis or need for such.
Item 3. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures.
An evaluation was performed under the supervision and with the participation of
our management, including the chief executive officer, or CEO, who is also the
acting chief financial officer, or CFO, of the effectiveness of the design and
operation of our disclosure procedures. Based on management's evaluation as of
as of the end of the period covered by this Report, our principal executive
officer and chief financial officer has concluded that our disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") were sufficiently
effective to ensure that the information required to be disclosed by us in the
reports that we file under the Exchange Act is gathered, analyzed and disclosed
with adequate timeliness, accuracy and completeness.
Changes in internal controls.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation referred to above, nor were there any significant deficiencies or
material weaknesses in our internal controls. Accordingly, no corrective actions
were required or undertaken except as disclosed.
- - 17 -
PROTOSOURCE CORPORATION
OTHER INFORMATION
(unaudited)
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
From time to time the Company is subject to litigation incidental to its
business. The Company is not currently a party to any material legal proceedings
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
Item 6. EXHIBITS.
Exhibits.
The following exhibits are filed with this report:
Exhibit 31.1 - Certification of CEO and CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.1 - Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350
- - 18 -
PROTOSOURCE CORPORATION
-----------------------
SIGNATURE
- --------------------------------------------------------------------------------
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PROTOSOURCE CORPORATION
/s/ Peter Wardle
----------------
Peter Wardle,
Chief Executive Officer/
Chief Financial Officer
Date: May 11, 2007
- - 19 -