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 September 30, 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 September 30, 2007.
PROTOSOURCE CORPORATION
-----------------------
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 30, 2007
- ------------------------------------------------------------------------------------------
INDEX
-----
Part I - Financial Information (unaudited):
Item 1. Condensed consolidated balance sheet -
September 30, 2007 3
Condensed consolidated statement of operations for the
nine-month and three-month periods ended
September 30, 2007 and 2006 4
Condensed consolidated statement of stockholders'
deficiency for the nine-month period ended September 30, 2007 5
Condensed consolidated statement of cash flows for the
nine-month periods ended September 30, 2007 and 2006 6 & 7
Notes to condensed consolidated financial statements
for the nine-month period ended September 30, 2007 8 to 15
Item 2. Management's discussion and analysis or
plan of operations and results of operations 16 to 22
Item 3. Controls and procedures 22
Part II - Other Information
Other Information 23
Signature and certifications 24
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.
- - 2 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2007
(unaudited)
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 47,298
Accounts receivable, net of allowance of $68,605 372,021
Advances to officers, net of obligations to officers 64,347
Prepaid expenses and other 9,622
------------
Total current assets 493,288
------------
Property and equipment, at cost, net of
accumulated depreciation and amortization of $537,737 106,290
------------
Other assets:
Goodwill - Acquisition of P2i Newspaper 375,067
Deposits 12,148
------------
Total other assets 387,215
------------
Total assets $ 986,793
============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Notes payable $ 2,425,000
Current portion of obligations under capital leases 20,345
Accounts payable 113,887
Accrued interest 1,409,983
Accrued expenses 477,655
Amounts due to related party - P2i, Inc. 262,800
------------
Total current liabilities 4,709,670
------------
Obligations under capital leases, non-current portion 9,603
Stock subscriptions payable 661,844
------------
Total non-current liabilities 671,447
------------
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 52,849
Accumulated deficit (33,298,420)
------------
Net stockholders' deficiency (4,394,324)
------------
Total liabilities and net stockholders' deficiency $ 986,793
============
See accompanying notes.
- - 3 -
PROTOSOURCE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
- -------------------------------------------------------------------------------------------------------------
NINE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net revenues $ 2,087,027 $ 1,910,331 $ 732,897 $ 641,945
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of revenues 1,217,407 1,104,603 439,473 393,962
Selling, general and administrative 756,362 585,316 265,512 184,182
Depreciation and amortization 37,709 34,672 15,664 19,260
Loss on disposal of property and equipment -- 21,826 -- --
------------ ------------ ------------ ------------
Total operating costs and expenses 2,011,478 1,746,417 720,649 597,404
------------ ------------ ------------ ------------
Operating income 75,549 163,914 12,248 44,541
------------ ------------ ------------ ------------
Other income (charges):
Other income 7,633 9,041 7,505 1,600
Impairment charges (529,179) -- (529,179) --
Interest expense (286,629) (262,914) (90,591)
Other expense (5,047) (6,222) (200) (1,418)
------------ ------------ ------------ ------------
Net other (charges) (813,222) (260,095) (619,883) (90,409)
------------ ------------ ------------ ------------
Net loss ($ 737,673) ($ 96,181) ($ 607,635) ($ 45,868)
============ ============ ============ ============
Net loss per basic and diluted
share of common stock ($ 0.02) ($ -- ) ($ 0.02) ($ -- )
============ ============ ============ ============
Weighted average number of basic and diluted
common shares outstanding 32,874,548 32,874,548 32,874,548 32,874,548
============ ============ ============ ============
See accompanying notes.
- - 4 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------
Preferred Stock Common Stock Additional
--------------- ------------ Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2006 193,836 $ 416,179 9,927,329 $ 26,143,461 $ 2,291,607
Net loss
Other comprehensive income, net of tax:
Foreign currency translation adjustments
------------ ------------ ------------ ------------ ------------
Total comprehensive (loss)
Balance, September 30, 2007 193,836 $ 416,179 9,927,329 $ 26,143,461 $ 2,291,607
============ ============ ============ ============ ============
Table continues below.
Accumulated
Other
Comprehensive Accumulated Comprehensive
Income Deficit Total (Loss)
------------ ------------ ------------ ------------
Balance, December 31, 2006 $ 43,532 ($32,560,747) ($ 3,665,968)
Net loss -- (737,673) (737,673) ($ 737,673)
Other comprehensive income, net of tax:
Foreign currency translation adjustments 9,317 -- 9,317 9,317
------------ ------------ ------------ ------------
Total comprehensive (loss) ($ 728,356)
============
Balance, September 30, 2007 $ 52,849 ($33,298,420) ($ 4,394,324)
============ ============ ============
See accompanying notes.
- - 5 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
- -------------------------------------------------------------------------------------
NINE-MONTH PERIOD
ENDED
SEPTEMER 30,
2007 2006
--------- ---------
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net loss ($737,673) ($ 96,181)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 37,709 34,672
Provision for bad debts 52,713 --
Loss on exchange of currency 1,665 --
Loss on disposal of property and equipment -- 21,826
Write-off of amounts due from related party - P2i, Inc. 257,179 --
Net assets acquired through foreclosure (1,096) --
Changes in operating assets and liabilities:
Accounts receivable (77,982) (27,586)
Prepaid expenses and other assets 1,261 (2,993)
Accounts payable 60,383 15,040
Accrued expenses 553,423 284,931
--------- ---------
Net cash provided by operating activities 147,582 229,709
--------- ---------
Cash flows from investing activities:
Acquisitions of property and equipment (5,850) (55,676)
Deposits (4,374) (5,914)
(Increase) in amount due from related company (66,600) (71,800)
(Increase) in advances to officers (14,669) (89,836)
--------- ---------
Net cash (used in) investing activities (91,493) (223,226)
--------- ---------
Cash flows from financing activities:
Payments on obligations under capital leases (22,950) (18,793)
--------- ---------
Net cash (used in) financing activities (22,950) (18,793)
--------- ---------
Net increase (decrease) in cash before effect of
exchange rate changes on cash 33,139 (12,310)
Effect of exchange rate changes on cash 9,317 --
--------- ---------
Net increase (decrease) in cash 42,456 (12,310)
Cash at beginning of period 4,842 40,812
--------- ---------
Cash at end of period $ 47,298 $ 28,502
========= =========
CONTINUED ON NEXT PAGE
See accompanying notes.
- - 6 -
PROTOSOURCE CORPORATION
-----------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
NINE-MONTH PERIOD
ENDED
SEPTEMBER 30,
2007 2006
------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $10,633 $13,078
------- -------
Income taxes $ -- $ --
------- -------
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Acquisition of equipment under capital lease obligation $20,123 $26,827
------- -------
Acquisition of equipment from foreclosure on note $46,638 $ --
------- -------
Acquisition of prepaid expenses from foreclosure on note $10,000 $ --
------- -------
See accompanying notes.
- - 7 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 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. On August 16, 2007, the Company exercised its security
interests and entered into a foreclosure acquisition agreement with Brand X
Networks, Inc., taking possession of its business assets as collateral due
to its inability to pay its debt to the Company. These assets were
transferred to ProtoSource Acquisition II, Inc., a Nevada corporation
(incorporated August 15, 2007) and a wholly owned subsidiary of the
Company, on September 1, 2007. Effective September 1, 2007, the Company
provides bilingual technical support services, web-hosting, and Internet
connectivity (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 nine months ended
September 30, 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:
- - 8 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007
(unaudited)
- --------------------------------------------------------------------------------
1. Nature of Operations and Summary of Significant Accounting Policies -
Continued
Services of P2i Newspaper comprise the following:
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.
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.
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.
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.
Services of ProtoSource Acquistion II, Inc. comprise the following:
Internet Hosting Services - These operations are principally engaged in
providing bilingual technical support services, web-hosting and Internet
connectivity.
- - 9 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 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 September 30, 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 September, 30 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 NINE-MONTH PERIOD ENDED SEPTEMBER 30, 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 Bulletin ("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.
In February 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities", providing companies with an
option to report selected financial assets and liabilities at fair value.
The Standard's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring
related assets and liabilities differently. Generally accepted accounting
principles have required different measurement attributes for different
assets and liabilities that can create artificial volatility in earnings.
SFAS No. 159 helps to mitigate this type of accounting-induced volatility
by enabling companies to report related assets and liabilities at fair
value, which would likely reduce the need for companies to comply with
detailed rules for hedge accounting. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types of assets and liabilities. The Standard requires companies to provide
additional information that will help investors and other users of
financial statements to more easily understand the effect of the Company's
choice to use fair value on its earnings. It also requires entities to
display the fair value of those assets and liabilities for which the
Company has chosen to use fair value on the face of the balance sheet. SFAS
No. 159 is effective for the Company on January 1, 2007. The adoption of
the provision of SFAS No. 159 is not expected to have a material effect on
the Company's financial position, results of operations, or cash flows.
- - 11 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007
(unaudited)
- --------------------------------------------------------------------------------
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.
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.
On August 16, 2007 the Company exercised its security interests and entered
into a foreclosure acquisition agreement with Brand X Networks, Inc.,
taking possession of its business assets as collateral due to its inability
to pay its debt to the Company. These assets were transferred to
ProtoSource Acquisition II, Inc., a Nevada corporation (incorporated August
15, 2007) and a wholly owned subsidiary of the Company, on September 1,
2007. Effective September 1, 2007, the Company provides bilingual technical
support services, web-hosting, and Internet connectivity.
In respect to the foreclosure acquisition agreement, ProtoSource
Acquisition II, Inc. acquired computer equipment, computer software and
supplies, office equipment, tools, furniture and fixtures and prepaid
expenditures valued at approximately $57,000. It also assumed specific
liabilities in respect to service providers and agreed to honor accrued
vacation pay of former Brand X Networks, Inc. employees hired on September
1, 2007 by ProtoSource Acquisition II. These liabilities approximated
$56,000. As a consequence of this action, a net recovery of approximately
$1,000, classified as "other income", was recorded during the current
period.
- - 12 -
PROTOSOURCE CORPORATION
-----------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007
(unaudited)
- --------------------------------------------------------------------------------
3. Sale of ISP Division - Continued
As a further component to the reacquisition of the collateralized assets of
Brand X Networks, Inc., the Company gave consideration to P2i, Inc. (a
related party) who became a controlling owner of Brand X Networks, Inc.
through its March 2006 purchase of the original note held by the Company in
respect to the sale of the Company's ISP assets to Brand X. In
consideration for P2i, Inc.'s management and controlling interest in Brand
X Networks, Inc., and such that P2i, Inc. would not act to oppose the
matter of foreclosure on the assets of Brand X Networks, the Company
forgave P2i, Inc.'s existing liabilities to the Company through August 28,
2007 and will continue to support P2i, Inc. in the discharge of liabilities
(arising prior to the January 1, 2004 P2i Newspaper merger with the
Company) out of the Company's cash flow until such obligations are fully
discharged. The value of this consideration is estimated to be
approximately $529,200, which has all been characterized as goodwill. This
includes the net amount of $257,179 outstanding to the Company as of August
28, 2007, plus an additional $272,000. As a consequence of this action,
during the current period the Company recorded a $257,179 write-off of
amounts due to the Company and recorded an obligation in accrued expenses
of $272,000. Because of the related party nature of this goodwill,
management has deemed it to be impaired and has recorded the charge in
other charges in the consolidated statement of operations.
- - 13 -
PROTOSOURCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007
(unaudited)
- --------------------------------------------------------------------------------
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.
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.
- - 14 -
PROTOSOURCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2007
(unaudited)
- --------------------------------------------------------------------------------
5. Business Segment Data
The Company has two reportable business segments. The following is a
description of each operating segment:
Media & Data Conversion Technologies - These operations are principally
engaged in the mining and database management of print, graphic and data
content for the publishing industry, and its distribution via the Internet.
Data is deliverable to the Company's web servers for seamless integration
into the clients' hosted web sites, but also is distributed back to the
client, and their business partners, in a wide range of formats to fit
continually evolving, highly-diversified applications.
Technical Support & Hosting Services - These operations are principally
engaged in providing bilingual technical support services, web-hosting, and
Internet connectivity.
Financial information for the two reporting segments is shown below:
NINE-MONTH THREE-MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
----------- ----------- ----------- -----------
Net revenues
Media & Data Conversion Technologies $ 2,012,891 $ 1,910,331 $ 658,761 $ 641,945
Technical Support & Hosting Services 74,136 -- 74,136 --
----------- ----------- ----------- -----------
$ 2,087,027 $ 1,910,331 $ 732,897 $ 641,945
=========== =========== =========== ===========
Income (loss) from operations
Media & Data Conversion Technologies $ 718,595) ($ 96,181) ($ 588,557) ($ 45,868)
Technical Support & Hosting Services (19,078) -- (19,078) --
----------- ----------- ----------- -----------
($ 737,673) ($ 96,181) ($ 607,635) ($ 45,868)
=========== =========== =========== ===========
September 30, December 31,
2007 2006
---------- ----------
Identifiable assets
Media & Data Conversion Technologies $ 883,084 $1,048,627
Technical Support & Hosting Services 103,709 --
---------- ----------
$ 986,793 $1,048,627
========== ==========
- - 15 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
AND RESULTS 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 - Nine Months ended September 30, 2007 vs. Nine Months
ended September 30, 2006
- ----------------------------------------------------------------------------
Net Revenues - For the nine months ended September 30, 2007 and 2006, net
revenues were $2,087,027 and $1,910,331 respectively. $2,012,891 of revenues are
attributed to the operations of P2i Newspaper acquired January 1, 2004 and
$74,136 are attributed to the operations of ProtoSource Acquisition II
established August 15, 2007. This represents a combined increase of $176,696 in
revenues over the previous year.
In respect to P2i Newspaper, an increase of $102,560 over last year is largely
attributable to the following: 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.
In respect to ProtoSource Acquisition II, Inc., net revenues totaling $74,136
are attributable to ISP service operations commencing September 1, 2007.
Operating Costs and Expenses - For the nine months ended September 30, 2007,
operating costs and expenses totaled $2,011,478 versus $1,746,417 in 2006, a
$265,061 rise over the previous year.
$93,214 of this amount is directly attributable to the operations of ProtoSource
Acquisition II, Inc. which commenced operations September 1, 2007.
$171,847 of the additional operating costs and expenses are related to the
operations of P2i Newspaper and are due to the following:
Approximately $28,000 of higher production expenditures necessary to meet the
approximately 5% increase in revenues. However, during the nine months ended
September 30, 2007, cost of revenues as a percentage of revenues fell about 1%
under their mark in 2006. This was largely due to reductions in production staff
levels with increasing efficiencies to overcome adverse changes in the Ringgit
exchange rate.
For the nine months ended September 30, 2007, selling, general and
administrative expenses posted an increase of approximately $171,000 over the
previous year due to the following significant components:
- - 16 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
A provision of approximately $53,000 was recorded for uncollectible billings to
Brand X Networks, approximately $37,000 more in sales development efforts were
incurred this year over the same period in 2006, a provision of about $56,000
was recorded in respect to advances taken during 2006 that are expected to be
taken as officers' compensation in fiscal 2007, and approximately $25,000 more
in accounting, legal, insurance and office expenses were recorded over last
year's levels. Also in consideration of such comparative operating differences,
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 $286,629 for the nine-month period
ended September 30, 2007 versus $262,914 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.
Other income and charges - As a result of a foreclosure acquisition agreement
dated August 15, 2007 with Brand X Networks, Inc., other income included an
approximate $1,000 recovery of net assets from Brand X, and other charges
included an impairment charge in connection with $529,179 in consideration given
to P2i, Inc., a related party, under this arrangement.
Foreclosure acquisition agreement -- On August 16, 2007 the Company exercised
its security interests and entered into a foreclosure acquisition agreement with
Brand X Networks, Inc., taking possession of its business assets as collateral
due to its inability to pay its debt to the Company. These assets were
transferred to ProtoSource Acquisition II, Inc., a Nevada corporation
(incorporated August 15, 2007) and a wholly owned subsidiary of the Company, on
September 1, 2007.
In respect to the foreclosure acquisition agreement, ProtoSource Acquisition II,
Inc. acquired computer equipment, computer software and supplies, office
equipment, tools, furniture and fixtures and prepaid expenditures valued at
approximately $57,000. It also assumed specific liabilities in respect to
service providers and agreed to honor accrued vacation pay of former Brand X
Networks, Inc. employees hired on September 1, 2007 by ProtoSource Acquisition
II. These liabilities approximated $56,000. As a consequence of this action, a
net recovery of approximately $1,000, classified as "other income", was recorded
during the current period.
As a further component to the reacquisition of the collateralized assets of
Brand X Networks, Inc., the Company gave consideration to P2i, Inc. (a related
party) who became a controlling owner of Brand X Networks, Inc. through its
March 2006 purchase of the original note held by the Company in respect to the
sale of the Company's ISP assets to Brand X. In consideration for P2i, Inc.'s
management and controlling interest in Brand X Networks, Inc., and such that
P2i, Inc. would not act to oppose the matter of foreclosure on the assets of
Brand X Networks, the Company forgave P2i, Inc.'s existing liabilities to the
Company through August 28, 2007 and will continue to support P2i, Inc. in the
discharge of liabilities (arising prior to the January 1, 2004 P2i Newspaper
merger with the Company) out of the Company's cash flow until such obligations
are fully discharged. The value of this consideration is estimated to be in
excess of $529,200, which has all been characterized as goodwill. This includes
the net amount of $257,179 outstanding to the Company as of August 28, 2007 plus
an additional $272,000. As a consequence of this action, during the current
period the Company recorded a $257,179 write-off of amounts due to the Company
and recorded an obligation in accrued expenses of $272,000. Because of the
related party nature of this goodwill, management has deemed it to be impaired
and has recorded the charge in other charges in the consolidated statement of
operations.
- - 17 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
Results of Operations - Three Months ended September 30, 2007 vs. Three Months
ended September 30, 2006
- ------------------------------------------------------------------------------
Net revenues - For the three-month periods ended September 30, 2007 and 2006,
net revenues were $732,897 and $641,945, respectively. $658,761 of revenues are
attributed to the operations of P2i Newspaper acquired January 1, 2004 and
$74,136 are attributed to the operations of ProtoSource Acquisition II
established August 15, 2007. This represents a combined increase of $90,952 in
revenues over the previous year.
In respect to P2i Newspaper, an increase of $16,817 over last year is largely
attributable to a sales effort focused on media companies within the newspaper
vertical that have a demand for the conversion of large volumes and 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 September 30, 2007,
operating costs and expenses totaled $720,649 versus $597,404 in 2006, a
$123,245 rise over the same period in the previous year.
$93,214 of this amount is directly attributable to the operations of ProtoSource
Acquisition II, Inc. which commenced operations September 1, 2007.
$30,031 of the additional operating costs and expenses are related to the
operations of P2i Newspaper and are due to the following:
Approximately $39,000 of lower production expenditures to meet an approximately
3% increase in revenues was largely due to substantial reductions in production
staff levels while simultaneously working to increase production efficiencies
during the period. During the three months ended September 30, 2007, cost of
revenues as a percentage of revenues fell about 7% under their mark in 2006.
For the three months ended September 30, 2007, selling, general and
administrative expenses posted an increase of approximately $69,000 over the
previous year due to the following significant components: About $18,000 more in
sales development efforts were incurred over the same period in 2006, a
provision of about $19,000 was recorded in respect to advances taken in 2006
that are expected to be taken as officers' compensation in fiscal 2007,
approximately $20,000 additional consulting and legal fees were incurred, about
$12,000 more in insurance costs were recorded over last year's levels during the
same period.
Interest expense - Interest expense totaled $98,009 for the three-month period
ended September 30, 2007 versus $90,591 in the same period in 2006. The interest
expense is the 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.
Other income and charges - As a result of a foreclosure acquisition agreement
dated August 15, 2007 with Brand X Networks, Inc., other income included a
$1,096 recovery of net assets from Brand X and other charges included a $529,179
consideration given to P2i, Inc., a related party, under this arrangement.
Foreclosure acquisition agreement -- On August 16, 2007 the Company exercised
its security interests and entered into a foreclosure acquisition agreement with
Brand X Networks, Inc., taking possession of its business assets as collateral
due to its inability to pay its debt to the Company. These assets were
transferred to ProtoSource Acquisition II, Inc., a Nevada corporation
(incorporated August 15, 2007) and a wholly owned subsidiary of the Company on
September 1, 2007.
- - 18 -
PROTOSOURCE CORPORATION
-----------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
AND RESULTS OF OPERATIONS - CONTINUED
(unaudited)
- --------------------------------------------------------------------------------
In respect to the foreclosure acquisition agreement, ProtoSource Acquisition II,
Inc. acquired computer equipment, computer software and supplies, office
equipment, tools, furniture and fixtures and prepaid expenditures valued at
approximately $57,000. It also assumed specific liabilities in respect to
service providers and agreed to honor accrued vacation pay of former Brand X
Networks, Inc. employees hired on September 1, 2007 by ProtoSource Acquisition
II. These liabilities approximated $56,000. As a consequence of this action, a
net recovery of $1,096, classified as "other income" was recorded during the
current period.
As a further component to the reacquisition of the collateralized assets of
Brand X Networks, Inc., the Company gave consideration to P2i, Inc. (a related
party) who became a controlling owner of Brand X Networks, Inc. through its
March 2006 purchase of the original note held by the Company in respect to the
sale of the Company's ISP assets to Brand X. In consideration for P2i, Inc.'s
management and controlling interest in Brand X Networks, Inc., and such that
P2i, Inc. would not act to oppose the matter of foreclosure on the assets of
Brand X Networks, the Company forgave P2i, Inc.'s existing liabilities to the
Company through August 28, 2007 and will continue to support P2i, Inc. in the
discharge of liabilities (arising prior to the January 1, 2004 P2i Newspaper
merger with the Company) out of the Company's cash flow until such obligations
are fully discharged. The value of this consideration is estimated to be in
excess of $529,200, which has all been characterized as goodwill. This includes
the net amount of $257,179 outstanding to the Company as of August 28, 2007 plus
an additional $272,000. As a consequence of this action, during the current
period the Company recorded a $257,179 write-off of amounts due to the Company
and recorded an obligation in accrued expenses of $272,000. Because of the
related party nature of this goodwill, management has deemed it to be impaired
and has recorded the charge in other charges in the consolidated statement of
operations.
- - 19 -
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 nine-month periods ending September 30, 2007 and 2006.
Though the Company's net loss for the nine-month period ended September 30, 2007
was approximately $738,000, cash flows provided by operations approximated
$148,000. In part, this was due to the following non-cash charges included in
the net loss: Approximately $38,000 of depreciation and amortization,
approximately $53,000 provision for bad debts, and approximately $257,000 of
amounts due to the Company from P2i, Inc. related to a foreclosure acquisition
agreement which were written off. In addition to non-cash charges to income,
cash flows from operations were aided by approximately $537,000 of net changes
in the Company's working capital components. Significant components affecting
working capital and availability of cash - because they were accrued during the
period but unpaid -- were as follows: Approximately a net amount of $263,000
payable to P2i, Inc. in respect to a foreclosure acquisition agreement was
recorded, approximately $276,000 of accrued interest arising from the Company's
convertible debt obligations and approximately $78,000 increase in accrued
supplier and service provider obligations. These positive contributing factors
of working capital and available cash were offset by approximately $78,000
increase in outstanding receivables and an approximately $2,000 reduction in
levels of accrued payroll liabilities.
During the nine-month period ended September 30, 2007, the Company had negative
cash flows from investing activities of approximately $91,000. This consisted of
approximately $6,000 for acquisitions of new equipment, approximately $4,000 to
security deposits, approximately $15,000 of advances to directors and officers,
and approximately $67,000 of cash provided to a related company.
And during the nine-month period ended September 30, 2007, the Company used,
through its financing activities, approximately $23,000 of funds for payments on
capital lease obligations.
As of September 30, 2007, the Company had $47,298 in cash and $445,990 in
accounts receivable and other current assets. Taken together with $4,709,670 of
total current liabilities, this resulted in a negative working capital position
of $4,216,382 at September 30, 2007. $3,834,983 of this amount pertains to the
Company's obligations to its convertible debt holders and $262,800 of this
amount pertains to the Company's obligations to P2i, Inc., a related party.
- - 20 -
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.
In July 2007, the Company entered into an investment banking agreement with
Colebrooke Capital, Inc. The agreement is for $2.5 million in potential capital
funding. The fees under this arrangement are $7,500 down and $3,500 for the
first 90 days of the agreement. Under this arrangement the Company will be
required to a pay a 7% financing fee on any funds raised by Colebrooke Capital.
Furthermore, in respect to capital transactions introduced by Colebrooke
Capital, there will be a 5% transaction fee requirement, but no fees on any
Company generated deals.
- - 21 -
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 $68,605 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.
- - 22 -
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
- - 23 -
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: November 14, 2007
- - 24 -