SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1995.
__ Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____ to ____
Commission file number 0-15873
LASERGATE SYSTEMS, INC.
(Exact name of small business issuer in its charter)
Florida 59-2543206
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
28050 US 19 N, Suite 502, Clearwater, Florida 34621
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (813) 725-0882
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act 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 ___
State the number of shares outstanding of each of the issuer s classes of
common equity, as of the latest practical date.
Class Outstanding at June 30, 1995
Common stock $0.03 par value 3,023,013
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1995
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of June 30, 3
1995 (unaudited) and December 31, 1994
Consolidated Statements of Operations 4
(unaudited) for the three months
and the six months ended June 30, 1995 and 1994
Consolidated Statements of Cash Flows 5
(unaudited) for the six months ended
June 30, 1995 and 1994
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan 11
of Operation
Part II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a 14
Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K 14
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Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1995 1994
Current assets (Unaudited)
Cash and cash equivalents $ 303,497 $ 1,589,837
Account receivable, net of allowance for
doubtful accounts of $29,423 and $17,000 632,075 152,529
Inventories 192,182 124,680
Prepaid expenses 104,680 116,948
Total current assets 1,232,614 1,983,994
Property and equipment 238,415 96,993
Systems and software costs 1,605,574 529,558
Other assets (including
goodwill of $2,646,036 and $536,919) 3,143,688 868,286
$ 6,220,291 $ 3,478,831
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Note payable, related party 300,000 0
Notes payable, other: 10,950 74,910
Current portion of obligations
under capital leases 14,028 0
Accounts payable, trade 471,134 530,260
Customer payment for future services 92,619 62,000
Deferred revenue 253,230 0
Accrued expenses:
Salaries and wages 18,538 53,647
Reinstallation 259,684 281,075
Other 185,458 58,447
Total current liabilities 1,605,641 1,060,339
Obligations under capital leases,
less current portion 24,988 0
Note payable, related party 0 200,000
Promissory notes payable, shareholders,
with conversion features 2,324,335 0
Common stock subject to put options 210,000 210,000
Obligations to issue common stock
and common stock options 682,500 450,000
Stockholders' equity:
Preferred stock, $.03 par value,
2,000,000 shares authorized, 95,950
and 36,364 shares of Series A issued
and outstanding 111,800 and -0- shares
of Series B issued and outstanding
at June 30, 1995 and December 31,
1994, respectively 6,232 1,091
Common stock, $.03 par value,
3,023,013 shares authorized, 3,023,013
and 2,913,680 issued and outstanding at
June 30, 1995 and December 31,
1994, respectively 90,691 87,412
Additional paid-in capital 11,333,978 9,258,563
Less: Common stock, $.03 par value,
30,000 shares subject to put options (210,000) (210,000)
Note receivable, shareholders (559,000) 0
Accumulated deficit (9,289,074) (7,578,574)
Total stockholder's equity 1,372,827 1,558,492
$ 6,220,291 $ 3,478,831
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Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1995 1994 1995 1994
Revenues $ 871,994 $ 646,800 $ 1,490,449 $ 692,857
Cost of goods sold 298,521 333,343 664,076 350,667
Gross profit 573,473 313,457 826,373 342,190
Selling, general and
admin. expenses 1,199,554 539,798 2,507,944 815,691
Operating loss (626,081) (226,341) (1,681,571) (473,501)
Interest expense 16,605 19,438 28,929 38,395
Loss before
income taxes (642,686) (245,779) (1,710,500) (511,896)
Income taxes 0 0 0 0
Net loss $( 642,686) $( 245,779) $(1,710,500) $(511,896)
Net loss per
common share $(.21) $(.19) $(.57 ) $(.61)
Weighted Average Common
Stock Outstanding 3,023,013 1,261,063 3,023,013 842,548
The accompanying notes are an integral part of these statements
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Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
June 30, June 30,
1995 1994
Cash flows from operating activities:
Net loss $(1,710,500) $(511,896)
Adjustments to reconcile net loss
to cash used in operating activities:
Depreciation and amortization 292,204 23,271
Increase (decrease) in allowance for
doubtful accounts 12,423 (6,855)
Common stock issued principally for services 0 131,422
Obligations to issue options granted as
compensation for services 232,500 0
Decrease (increase) in:
Accounts receivable, trade (479,546) (119,547)
Inventories (67,502) (60,340)
Prepaid expenses 12,088 (11,365)
Other (principally related to
prepaid insurance) 25,798 0
Increase (decrease) in:
Accounts payable and accrued expenses (48,010) 124,298
Customer payment for future services 30,619 100,000
Deferred revenue 253,230 0
Net cash provided by (used in)
operating activities (1,446,696) (531,012)
Cash flows from investing activities:
Additions to property and equipment (81,460) (6,366)
Product design costs (17,684) 0
Note receivable, stockholders (559,000) 0
Repayment of advances to joint venture 29,657 0
Other 0 60
Net cash used in investing activities (628,487) (6,306)
Cash flows from financing activities:
Proceeds from loans, related parties 859,505 777,005
Repayment of loans, other (63,960) (100,000)
Repayment of loans, related parties 0 (27,500)
Repayment of obligations under capital leases (6,702) 0
Public/private placement costs 0 (61,960)
Net cash provided by financing activities 788,843 587,545
Net increase (decrease) in cash
and cash equivalents (1,286,340) 50,227
Cash and cash equivalents,
beginning of period 1,589,837 15,377
Cash and cash equivalents, end of period $ 303,497 $ 65,604
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LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1995
NOTE 1- BASIS OF PRESENTATION
The interim consolidated financial statements of Lasergate Systems, Inc. (the
Company) are unaudited and should be read in conjunction with the consolidated
financial statements and notes thereto in its Form 10-KSB for the year ended
December 31, 1994. In the opinion of management, the accompanying consolidated
financial statements (with all explanations contained in these Notes ) contain
all adjustments necessary for a fair presentation of the results of operations
for this interim period. Interim results are not necessarily indicative of the
results for a full fiscal year.
NOTE 2 - NET LOSS PER COMMON SHARE
The net loss per common share amount is based on the weighted average number
of common shares outstanding during the period.
NOTE 3 - OPERATIONAL AND FUNDING MATTERS
The information in Note 2 to the Company s 1994 Form 10-KSB is still current
related to the status of certain of the Company's operational and funding
matters and accordingly, should be referred to in conjunction with this Form
10-QSB.
NOTE 4-NOTES PAYABLE, RELATED PARTY
On February 6, 1995, the Company borrowed $559,505 on an unsecured basis from
two former principal shareholders under a promissory note due October 1996, at
an annual interest rate of 8%. On June 15, 1995, the Company borrowed
$300,000 under a Convertible Secured Promissory Note due March 30, 1996, from
a former principal shareholder at an annual interest rate of 9.5%.
On June 30, 1995, the Company issued 75,950 of its Series A Convertible
Preferred Stock in satisfaction of $759,505 of such Notes Payable (See
Note 8).
NOTE 5-OPERATING LEASE
In February 1995, the Company entered into an operating lease for its new
office facility, as the lease term for the previous office and warehouse
facilities expired. The lease term is for the period of March 1, 1995 to April
30, 1999, with annual minimum rent as follows.
1995 $ 61,056
1996 116,144
1997 123,748
1998 148,418
1999 50,220
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$499,586
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NOTE 6-ACQUISITIONS OF BUSINESS
On December 22, 1994, Lasergate Systems Canada Company, a wholly-owned
subsidiary of the Company, acquired the capital stock of Delta Information
Services, Inc. ( Delta ) a Canadian company for an aggregate consideration of
$1,200,000. The purchase price consisted of $500,000 of cash and a promissory
note of $700,000, convertible into 100,000 shares of the Company's unregis-
tered (subject to the registration rights discussed below) and restricted $.03
par value common stock valued at $7.00 a share. The common stock valuation
reflected the agreed-upon price between the buyer and seller and was approved
by the Company s Board of Directors after giving effect to such factors as
the restrictions on resale and the size of the block of common stock, etc.
The promissory note was immediately converted into common stock in December
1994. In addition, the Company incurred approximately $63,656 in direct
acquisition costs (principally legal and accounting fees). At the date of
acquisition, Delta had no tangible assets nor liabilities that were
transferred to or assumed by the Company. The sellers were granted certain
registration rights for two years with respect to the shares of common stock
issued and a put option to sell to the Company up to 10,000 of the shares of
the Company s common stock at $7.00 per share each year for the next three
years. The put option, which has an aggregate value of $210,000, has been
classified as common stock subject to put options in the consolidated balance
sheets and represents the amount the Company would be required to pay if all
the put options were exercised. Additionally, one of the sellers agreed to
act as a consultant to the Company for a one year fee of $70,000.
On February 15, 1995, the Company executed an agreement to purchase substan-
tially all of the assets of GIS Systems Limited Partnership (GIS), a company
formerly engaged in the business of design, integration, installation and sale
of admission control and revenue accounting computer systems and software for
the entertainment industry. The purchase price for the acquisition was valued
at approximately $3,700,000 and was based upon the expected revenues of GIS
and the competitiveness of its products. The purchase price consisted of
109,333 shares of the Company s common stock (par value $.03 a share), 111,800
shares of the Company s Series B Preferred Stock (par value $.03 a share).
The Company s promissory note in the principal amount of $591,000 (which may
be paid by the issuance by the Company of 118,200 shares of Series B
Preferred Stock) and the Company s promissory note in the principal amount
of $1,733,335 (which may be paid by the issuance by the Company of 346,667
shares of Series C Preferred Stock). In addition, the Company agreed to
assume certain liabilities of GIS (aggregating $45,718) and loaned GIS
$559,000 (see paragraph below). Direct acquisition costs aggregating $82,744
(principally legal and accounting fees) were incurred in connection with the
acquisition. The promissory notes which are convertible into preferred stock
derive their valuation from the underlying preferred stock. The common stock
valuation of $7.00 per share and the preferred stock valuation of $5.00 per
share reflected the agreed-upon price between the buyer and sellers and was
approved by the Company's Board of Directors after giving effect to such
factors as the restrictions and the sizes of the blocks of common and
preferred stock.
The loan of $559,000 to GIS evidenced by a promissory note is secured by
111,800 shares of the Company s Series B Preferred Stock and is due March 31,
1996. The sellers have the option of returning preferred stock if the
assignable call provision of $5.00 per share is not exercised. Accordingly,
the note receivable is presented as a reduction of stockholders equity.
The total purchase price of GIS was allocated based on fair value of net
tangible assets acquired with the excess allocated to identifiable intangible
components based on their individual estimated fair values, and the remainder
was allocated to goodwill.
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Net tangible assets acquired consist of:
Inventory $ 85,962
Prepaid expenses and
other current assets 20,472
Fixed assets 87,581
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194,015
Intangible assets components consist of:
Estimated Amortization
Useful Life Method
Systems and software costs $1,200,000 6 years Straight line
Customer list and support
contracts 300,000 6 years Straight line
Goodwill 2,083,113 20 years Straight line
----------
3,583,113
$3,777,128
Since these transactions have been accounted for as purchases in accordance
with APB No. 16 Business Combinations, accordingly, the results of Delta's
and GIS operations have been included in the Company s consolidated financial
statements from the date of acquisition. The following are proforma results
of operations for the three months ended June 30, 1994 and the six months
ended June 30, 1994 assuming the transactions were effective January 1, 1994,
after including the impact of certain adjustments such as consulting fees,
amortization of intangibles and reduction of selling, general and administra-
tive expenses (principally salaries and wages and rent to reflect personnel
not transferred and lease space not assumed).
Three Months Ended June 30, 1994
(Unaudited)
Delta GIS Delta and GIS Combined
Revenues $ 745,973 $1,498,483 $1,597,656
Net Loss $(342,210) $ (189,004) $ (285,435)
Loss per Common Share $ (.25) $ (.14) $ (.19)
Six Months Ended June 30, 1994
(Unaudited)
Delta GIS Delta and GIS Combined
Revenues $ 891,203 $2,396,224 $2,594,570
Net Loss $ (704,758) $ (398,347) $ (591,209)
Loss per Common Share $ (0.75) $ ( 0.47) $ (0.56)
The proforma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the period presented.
In addition, they are not intended to be a projection of future results of
operations.
NOTE 7 - LEGAL PROCEEDINGS
The Company's founder and former President and Chief Executive Officer, Donald
Turner, has commenced an action against the Company in Florida state court.
Mr. Turner alleges, among other things, that he was wrongfully terminated from
his employment and seeks damages which in the aggregate could exceed
$1,000,000. The Company believes that Mr. Turner's suit is without merit and
intends to vigorously defend the action.
NOTE 8 - STOCKHOLDERS EQUITY
Issuance of Preferred Stock
Effective February 15, 1995, the Board of Directors adopted a resolution to
change the Company's capital structure by establishing two additional series
of preferred stock: Series B and Series C. The authorized number of Series B
and Series C shares is 230,000 and 350,000, respectively. Holders of such
shares have no voting rights and dividend rates may be fixed by the Board of
Directors at its sole discretion. Both series are convertible into shares of
the Company s common stock.
Effective June 30, 1995, the Board of Directors adopted a resolution to
rescind its previously authorized Series A Preferred Stock and designate a
new Series A Preferred Stock in its place. The authorized number of Series A
shares is 200,000. Holders of such shares have no voting rights and the
shares bear cumulative dividends at the annual rate of 8% of the liquidation
value. The Series A shares are convertible into shares of the Company's
Common Stock.
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In June 1995, the Company issued 95,950 shares of its newly designated Series
A Preferred Stock to two former principal shareholders in satisfaction of
$759,505 in promissory notes due October 1996 and in conversion of 36,364
shares of previously designated Series A Preferred Stock.
Reservation of Common Stock
In February 1995, the underwriter of the Company's secondary public offering
agreed not to exercise its warrants to purchase a total of 276,000 shares of
common stock until the Company s authorized number of shares of common stock
has increased. In May 1995, two holders of stock options under the Company's
Stock Option Plan agreed not to exercise their rights to purchase a total of
16,000 shares of common stock until the Company s authorized number of shares
of common stock has increased. Consequently, the Company has no longer
reserved such shares for issuance. Effective February 1995, the Board of
Directors has approved an amendment to the Company s Articles of Incorporation
to increase the number of authorized shares of common stock from 5,000,000 to
12,000,000. Upon approval of this amendment by the shareholders of the
Company, the Company will reserve such shares for issuance. (See Note 10).
Authorization of Common Stock
The Board of Directors has proposed an amendment to the Company s Articles of
Incorporation to increase the number of authorized shares of common stock. The
amendment is not effective until it is approved by the shareholders of the
Company. (See Note 10).
Stock Option Plan
On March 7, 1995, the Board of Directors, subject to shareholder approval,
adopted amendments to the Company s 1994 stock option plan (the Plan). As
amended, (i) the number of shares which could be granted under the Plan would
be increased from 58,333 to 600,000 shares; (ii) the number of shares granted
to an optionee would be limited to 200,000 in a year; (iii) the exercise price
of non-qualified stock options granted to employees and consultants could not
be less than 25% of the fair market value of the common stock on the date of
the grant and (iv) outside Directors of the Company's Board of Directors would
be granted an option to purchase 5,000 shares of common stock for each year of
the respective term, with vesting as to 5,000 shares to occur at the beginning
of each year of such term.
Stock Option Grants
On March 7, 1995, the Board of Directors, authorized the grant of 375,000
non-qualified stock options at an exercise price of $2.00 per share to the
Company's President and Chief Executive Officer, in connection with a three
(3) year employment agreement. Of the total options granted, 125,000 were
granted as a signing bonus effective October 31, 1994 and were immediately
exercisable since their issuance was not contingent on future service.
Accordingly, compensation expense of $375,000, representing the difference
between fair value of $5.00 per share (determined by the Board of Directors
considering such factors as restrictions, etc.) and the exercise price, has
been recorded in the consolidated statement of operations for 1994.
In addition, a corresponding obligation to issue (grant) common stock options
also has been reflected in the balance sheet at December 31,1994. The balance
of the 250,000 options, which are subject to shareholder approval, vest as
to 125,000 shares on each of October 31, 1995 and 1996. The Company will
record additional compensation expense of $375,000 in 1995 and in 1996 to
correspond with the Chief Executive Officer s period of service. Compensation
expense of $232,500 was recorded for the six months ended June 30, 1995.
On March 7, 1995 the Board of Directors granted 25,000 non-qualified stock
options to the Company's former President and Chief Executive Officer, in
connection with services rendered to the Company in 1994. The exercise price
of the options is $2.00 per share and the options are immediately
exerciseable. Accordingly, compensation expense of $75,000, representing
the difference between the fair value of $5.00 per share (determined by the
Board of Directors) and the exercise price, has been recorded in the consoli-
dated statement of operations for 1994. In addition, a corresponding
obligation to issue (grant) common stock options also has been reflected in
the balance sheet at December 31, 1994.
On March 7, 1995 the Board of Directors granted 30,000 non-qualified stock
options at an exercise price of $2.00 per share to each of three of the
Company's senior executives for services in 1995. Of the total options
granted, 15,000 shares were immediately exerciseable with an additional
15,000 vesting January 1, 1996, 30,000 vesting January 1, 1997, and 30,000
vesting January 1, 1998. Compensation expense of $45,000 representing the
-9-
difference between fair value of $5.00 per share and the exercise price has
been recorded in the consolidated statement of operations for the six months
ended June 30, 1995. In addition, a corresponding obligation to issue
(grant) common stock options also has been reflected in the balance sheet at
June 30, 1995. The Company will record additional compensation of $45,000
in 1996 and $90,000 in each of 1997 and 1998.
NOTE 9 - NON-CASH INVESTING AND FINANCING ACTIVITIES
In January 1995, the Company acquired substantially all of the assets of GIS
(see Note 6) for stock, promissory notes and the assumption of certain
liabilities as set forth below.
Fair Value of Assets Acquired $ 3,777,000
Promissory Notes Issued $ 2,324,000
Common Stock Issued 765,000
Preferred Stock Issued 559,000
----------
3,648,000
Liabilities Assumed 83,000
Acquisition Cost Incurred (a liability) 46,000
----------
$ 3,777,000
In June 1995, the Company converted $759,505 of notes payable, related party
into 75,950 shares of its newly created Series A Preferred Stock.
NOTE 10 - SUBSEQUENT EVENTS
Effective August 1, 1995, the Board of Directors amended the resolution
adopted February 1995 to amend the Company's Articles of Incorporation to
increase the Company s authorized shares of Common Stock to 20,000,000.
The amendment is not effective until it is approved by the Shareholders of
the Company.
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ITEM 2-MANAGEMENT S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussions should be read in conjunction with the financial
statements and notes thereto, and is qualified in its entirety by reference
thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 VERSUS THREE MONTHS ENDED JUNE 30, 1994
Revenues increased by $225,194 or 34.8% from $646,800 during the three months
ended June 30, 1994 to $871,994 during the three months ended June 30, 1995.
Sales for the three months ended June 30, 1995 consisted of a number of new
system sales as well as maintenance and support contract revenue, reflecting
the results of an increase in direct sales staff and marketing activities made
possible by the infusion of capital from the Company s public offering in
October 1994. The increased sales for the period also resulted from the
Company's enhanced products and markets obtained through the acquisition of
Delta Information Services, Inc. (Delta) in December 1994 and GIS Limited
Partnership (GIS) in January 1995. Sales for the three months ended June 30,
1994 consisted primarily of one new system sale, which represented 47.9%
of total revenue for 1994.
Net loss increased by $396,907 from $245,779 for the three months ended June
30, 1994 to $642,686 for the three months ended June 30, 1995, or 161.5%.
Costs of goods sold ( COGS ) decreased from 51.5% of revenues for the three
months ended June 30, 1994 to 34.2% of revenues for the three months ended
June 30, 1995. This decrease in costs is due to the fact that COGS are
primarily related to the mix of product sales between service and software
sales, which carry a lower cost, and hardware sales, which carry a higher
cost. Although some improvement resulted from systems and procedures
implemented to reduce costs through better cost estimation and controls,
COGS are expected to vary based on product mix in the sales of given periods.
During 1994 a reserve of approximately $281,000 was established for the costs
of reinstallation of software and related required hardware at certain
customer sites in order to remedy technical problems as well as to standardize
the Company' s products to allow for more cost effective ongoing customer
support. During the quarter ended June 30, 1995 approximately $3,200 was
expended for reinstallations. Management believes that the reserve will be
adequate to cover the costs of all such reinstallations without further
provisions. Management further believes that the cost for reinstallations
may be reduced if proposed software upgrades for existing products can be made
to satisfy customer requirements, eliminating the need for hardware upgrades
which represented a significant amount of the original estimate for
reinstallation costs.
Selling, general and administrative expenses ( SG & A ) increased 122.2% from
$539,798 during the three months ended June 30, 1994 to $1,199,534 during the
three months ended June 30, 1995. During the three months ended June 30,
1994, the Company began to expend funds on a moderate basis to increase its
sales and marketing efforts in anticipation of completion of a public
offering which was intended to provide the funds necessary for the Company
to accelerate its growth. Funding during this period was provided by loans
from two major shareholders of the Company. Upon completion of its public
offering in October 1994, the Company began to restructure by first recruiting
experienced management and staff. The Company then completed two acquisitions
to enhance its product line and to introduce the Company to markets not
previously accessible to it. Management believes that as a result of these
acquisitions the Company can increase its revenues and become a more diverse
and profitable company much sooner than would otherwise have been possible.
The costs of implementation of its growth plan, including the costs of
integrating the operations and software of the three companies, impacted SG&A
for the three months ended June 30, 1995, but had less effect than in the
first three months of 1995. The increase in SG&A was attributable to
personnel-related expenses, which included fees paid to consultants who held
key positions in sales, marketing, technical and executive management which
increased 112.6% from approximately $310,000 for the three months ended June
30, 1994 to approximately $659,000 for the three months ended June 30, 1995;
legal, accounting, and other professional fees, which increased 162.0%
from approximately $50,000 for the three months ended June 30, 1994 to appro-
ximately $131,000 for the three months ended June 30, 1995; travel and enter-
tainment expense which increased 68.7% from approximately $67,000 for the
three months ended June 30, 1994 to approximately $113,000 for the three
months ended June 30, 1995; amortization of financing and acquisition costs
which increased 555.6% from approximately $18,000 for the three months ended
June 30, 1994 to approximately $118,000 for the three months ended June 30,
1995; telephone expense which increased 175% from approximately $20,000 for
the three months ended June 30, 1994 to approximately $55,000 for the three
months ended June 30, 1995. All other SG & A expenses cumulatively increased
65.3% from approximately $75,000 for the three months ended June 30, 1994 to
approximately $124,000 for the three months ended June 30, 1995. SG&A
personnel expenses include non-cash stock options or grants of $39,344 for the
three months ended June 30, 1994 and $93,750 for the three months ended June
30, 1995.
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SIX MONTHS ENDED JUNE 30, 1995 VERSUS SIX MONTHS ENDED JUNE 30, 1994
Revenues increased by $797,592 or 115.1% from $692,857 during the six months
ended June 30, 1994 to $1,490,449 during the six months ended June 30, 1995.
Sales for the six months ended June 30, 1995 consisted of a number of new
system sales as well as maintenance and support contract revenue, reflecting
the results of an increase in direct sales staff and marketing activities made
possible by the infusion of capital from the Company's public offering in
October 1994. The increased sales for the period also resulted from the
Company's enhanced products and markets obtained through the acquisition of
Delta in December 1994 and GIS in January 1995. Sales for the six months ended
June 30, 1994 consisted primarily of ongoing maintenance and support contracts
for existing customers during the first quarter, and revenue from one new
system sale, which represented 47.9% of total revenue for 1994 during the
second quarter.
Net loss increased by $1,198,606 from $511,896 for the six months ended June
30, 1994 to $1,710,500 for the first quarter of 1995, or 234.2%.
Costs of goods sold ( COGS ) decreased from 50.6% of revenues for the six
months ended June 30, 1994 to 44.6% of revenues for the six months ended June
30, 1995. This decrease in costs is due to the fact that COGS are primarily
related to the mix of product sales between service and software sales, which
carry a lower cost, and hardware sales, which carry a higher cost. Although
some improvement resulted from systems and procedures implemented to reduce
costs through better cost estimation and controls, COGS are expected to vary
based on product mix in the sales of given periods.
During 1994 a reserve of approximately $281,000 was established for the costs
of reinstallation of software and related required hardware at certain
customer sites in order to remedy technical problems as well as to standardize
the Company's products to allow for more cost effective ongoing customer
support. During the six months ended June 30, 1995 approximately $21,400 has
been expended for reinstallations. Management believes that the reserve will
be adequate to cover the costs of all such reinstallations without further
provisions. Management further believes that the cost for reinstallations may
be reduced if proposed software upgrades for existing products can be made to
satisfy customer requirements, eliminating the need for hardware upgrades
which represented a significant amount of the original estimate of
reinstallation costs.
Selling, general and administrative expenses (SG&A) increased 207.5% from
$815,691 during the six months ended June 30, 1994 to $2,507,944 during the
six months ended June 30, 1995. During the first half of 1994 the Company
was actively engaged in raising capital and reduced expenditures in all areas
of its operations until adequate funding was obtained. Upon completion of its
public offering in October 1994, the Company began to restructure by first
recruiting experienced management and staff. The Company then completed two
acquisitions to enhance its product line and to introduce the Company to
markets not previously accessible to it. Management believes that as a result
of these acquisitions the Company can increase its revenues and become a more
diverse and profitable company much sooner than would otherwise have been
possible. The costs of implementation of its growth plan including the costs
of integrating the operations and software of the three companies are
primarily responsible for the increase in SG & A for the six months ended June
30, 1995. More specifically, personnel-related expenses, which included fees
paid to consultants who held key positions in sales, marketing, technical and
executive management increased 167.8% from approximately $546,000 for the six
months ended June 30, 1994 to approximately $1,462,000 for the six months
ended June 30, 1995; legal, accounting, and other professional fees increased
272.2% from approximately $72,000 for six months ended June 30, 1994 to
approximately $268,000 for the six months ended June 30, 1995; travel and
entertainment expense increased 204.5% from approximately $67,000 for the six
months ended June 30, 1994 to approximately $204,000 for the six months ended
June 30, 1995; amortization of financing and acquisition costs increased
1372.3% from approximately $18,000 for the six months ended June 30, 1994 to
approximately $265,000 for the six months ended June 30, 1995; telephone
expense increased 174.2% from approximately $31,000 for the six months ended
June 30, 1994 to approximately $85,000 for the six months ended June 30, 1995.
All other SG&A expenses cumulatively increased 204.4% from approximately
$82,000 for the six months ended June 30, 1994 to approximately $224,000
for the six months ended June 30, 1995. SG & A personnel expenses include
non-cash stock options or grants of $117,774 for the six months ended June 30,
1994 and $232,560 for the six months ended June 30, 1995.
-12-
LIQUIDITY AND CAPITAL RESOURCES
From its inception in October 1985 through June 30, 1995 the Company has
incurred a cumulative loss of $9,289,074, with a loss of $1,710,500 for the
six months ended June 30, 1995. The Company has engaged in various financing
and investing activities.
During October 1994, the Company completed a public offering of 920,000 units
at a price of $5.50 per unit, each unit consisting of one share of Common
Stock and two redeemable warrants each to purchase one share of Common Stock.
Net proceeds to the Company were approximately $3,900,000.
From January through August 1994 two individuals loaned the Company an aggre-
gate of $959,505 at an interest rate of 8% per annum. In September 1994,
these individuals agreed to defer repayment of the loans until October 1996.
During October 1994, $200,000 of the $959,505 in outstanding loans was
converted into 36,364 shares of the Company Series A Preferred Stock.
In June 1995 the Company issued 95,950 shares of its newly designated Series A
Preferred Stock in satisfaction of the $759,505 outstanding loan balance and
in exchange for the 36,364 of previously issued shares of designated Series A
Preferred Stock.
In December 1994, Lasergate Systems Canada Company, a wholly-owned subsidiary
of the Company, acquired the capital stock of Delta for an aggregate conside-
ration of $1,200,000. The purchase price consisted of $500,000 of cash, a
promissory note of $700,000, convertible into 100,000 shares of the Company's
Common Stock. The promissory note was immediately converted into Common Stock.
In January 1995, the Company acquired substantially all of the assets of GIS
for an aggregate consideration of approximately $3,700,000. The purchase price
consisted of 109,333 shares of the Company's Common Stock, 111,800 shares of
the Company s Series B Preferred Stock and the Company's unsecured,
non-interest bearing promissory notes in the aggregate amount of $2,324,335.
The promissory notes are payable at the Company's option in cash or converti-
ble Preferred Stock. In addition, the Company has agreed to assume certain
liabilities of GIS and has loaned GIS $559,000 which has been evidenced by a
promissory note of GIS due March 1996, which is secured by the pledge to the
Company of the 111,800 shares of the Company's Series B Preferred Stock.
On June 15, 1995 the Company borrowed $300,000 under a Secured Convertible
Promissory Note due March 30, 1996, from a former shareholder at an annual
interest rate of 9.5%.
The Company anticipates that the improvements in its products, the addition of
new products and access to new markets resulting from the acquisitions of
Delta and GIS will result in substantial revenue growth, of which there can be
no assurance. Although the Company believes that it can achieve operating
profitability, prior to reaching that stage it will require additional capital
to fund the costs associated with integrating the products and operations of
the two acquired companies and substantial sales and marketing costs to pro-
mote the restructured Company and its products. At June 30, 1995 and August
10, 1995 the Company had a backlog of approximately $310,000 and $633,000,
respectively.
As a result of the significant use of cash for operating activities, the costs
of acquisitions, the costs involved in the merger of Delta s and GIS operation
and products into the Company s operations and the costs to promote and market
the reorganized Company and its product line to a more diverse market, the
Company will require additional financing. Although the Company might be able
to fund its operations at low levels of expenditures from revenues, the
Company intends to seek financing of up to approximately $3,500,000 during
1995 through the public and/or private sale of securities or short-term or
long-term borrowings to fund its expansion plans. There can be no assurance
the Company will be able to obtain such financing on acceptable terms, if at
all.
-13-
Part II-Other Information
Item 1-Legal Proceedings
On June 14, 1995 the Company's founder and former President and Chief Execu-
tive Officer, Donald Turner, commenced an action against the Company in the
Circuit Court of Pinellas County, Florida. Mr. Turner alleges, among other
things, that he was wrongfully terminated from his employment and seeks
damages which in the aggregate could exceed $1,000,000. The Company believes
that Mr. Turner s suit is without merit and intends to vigorously defend the
action.
The Company knows of no other material pending legal proceeding to which the
Company is a party or of which any of its properties is subject. No such
proceedings are known to the Company to be contemplated by governmental
authorities.
Item 4-Submission of Matters to a Vote of Security Holders
No shareholder meeting was held by the Company and no matter was submitted to
a vote of security holders during the six months ended June 30, 1995.
Item 6-Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
On March 2, 1995, a Report on Form 8-K relating to an event which occurred
on February 15, 1995 was filed. The initial filing (covering Items 2 and 7)
reported an acquisition of assets and included the audited financial
statements for the acquired entity. The 8-K/A filed on May 1, 1995
(covering Item 7) included the proforma financial statements.
-16- <PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Lasergate Systems, Inc.
Registrant
Date: August 11, 1995 /s/ VICKIE L. GUTH
Vickie L. Guth
Vice President of Finance
and Chief Financial Officer
-15-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> LASERGATE SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> 12/31/95
<PERIOD-END> 06/30/95
<CASH> 303,497
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<RECEIVABLES> 661,498
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