SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1998.
[_] 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
2189 Cleveland Street, Clearwater, Florida 33765
(Address of principal executive office) (Zip Code)
Issuer's telephone number: (813) 803-1574
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 May 14, 1998
- ----- ---------------------------
Common stock $0.03 par value 15,299,393
Transitional Small Business Disclosure Format (check one) Yes [_] No [X]
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Part I. FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of March 31, 1998 3
(unaudited) and December 31, 1997
Consolidated Statements of Operations 4
(unaudited) for the three months ended
March 31, 1998 and March 31, 1997
Consolidated Statements of Cash Flows 5
(unaudited) for the three months ended
March 31, 1998 and March 31, 1997
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan 10
of Operation
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
2
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Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 162,851 $ 390,760
Accounts receivable, net of allowances
of $172,690 and $157,690 255,768 455,001
Note receivable, current portion 50,251 50,251
Inventories 159,246 232,192
Prepaid expenses 21,163 30,838
------------ ------------
Total current assets 649,279 1,159,044
Property and equipment, net 265,005 305,509
Note receivable, long-term portion 59,091 59,091
Systems and software costs, net of amortization of $1,637,253
and $1,611,753 544,316 475,491
Goodwill, net of amortization of $431,804 and $398,557 2,216,469 2,249,716
Other assets, net 16,637 19,137
------------ ------------
Total assets $ 3,750,797 $ 4,267,988
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, bank $ 22,222 $ 23,575
Accounts payable, trade 623,061 780,271
Deferred revenues 310,078 356,471
Accrued warranty costs 551,427 554,497
Accrued expenses 915,130 912,190
------------ ------------
Total current liabilities 2,421,918 2,627,004
------------ ------------
Total liabilities 2,421,918 2,627,004
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000 shares authorized,
7,500 shares issued and outstanding at
March 31, 1998 and December 31, 1997, respectively 225 225
Common stock, $.03 par value, 20,000,000 shares authorized,
7,462,061 issued and outstanding at
March 31, 1998 and December 31, 1997 223,862 223,862
Additional paid-in capital 21,123,284 21,123,284
Accumulated deficit (20,018,492) (19,706,387)
------------ ------------
Total stockholder's equity 1,328,879 1,640,984
------------ ------------
Total liabilities and Stockholders' equity $ 3,750,797 $ 4,267,988
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
3
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Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
1998 1997
----------- -----------
Revenues $ 1,215,329 $ 1,278,576
Operating Expenses:
Cost of revenues 722,764 853,299
Development 25,894 132,637
Selling, general and administrative 781,835 867,083
----------- -----------
Operating loss (315,164) (574,443)
Other income (expense)
Interest 3,059 10,241
Other, net -- 1,405
----------- -----------
Loss before income taxes (312,105) (562,797)
Income taxes -- --
----------- -----------
Net loss $ (312,105) $ (562,797)
=========== ===========
Net loss per common share $ (.04) $ (.08)
=========== ===========
Weighted Average Common Stock Outstanding 7,462,061 7,362,061
=========== ===========
The accompanying notes are an integral part of these statements.
4
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Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($ 312,105) $ (562,797)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation of property and equipment 42,100 33,822
Amortization of intangibles 58,747 71,313
Increase in accounts receivable allowances 15,000 12,500
Decrease (increase) in:
Accounts receivable, trade 184,233 70,329
Inventories 72,946 132,873
Prepaid expense 9,678 (44,412)
Other 2,500 81,753
Increase (decrease) in:
Accounts payable and accrued expenses (154,270) (311,915)
Accrued product costs (3,070) 7,443
Deferred revenue (46,393) (486,364)
----------- -----------
Net cash used in operating activities (130,634) (995,455)
Cash flows from investing activities:
(Additions to), disposal of, property and equipment (1,597) (56,692)
Capitalized software development costs (94,325) (92,090)
----------- -----------
Net cash provided (used) in investing activities (95,922) (148,782)
----------- -----------
Cash flows from financing activities:
Issuance of note receivable -- (144,856)
Repayment of loans, other (1,353) (1,225)
----------- -----------
Net cash (used) for financing activities (1,353) (146,081)
----------- -----------
Net increase (decrease) in cash and cash equivalents (227,909) (1,290,318)
Cash and cash equivalents, beginning of period 390,760 1,924,825
----------- -----------
Cash and cash equivalents, end of period $ 162,851 $ 634,507
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE>
LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE 1- FINANCIAL STATEMENT PRESENTATION AND OTHER INTERNAL PRESENTATION
INTERIM PRESENTATION
The interim consolidated financial statements of Lasergate Systems, Inc. (the
ACompany@) 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, 1997. 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.
OPERATIONAL AND FUNDING MATTERS AND REPORTING BASIS
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. In the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997, the Company's auditors qualified their
opinion as to a going concern. The information contained in Note 3 to the
Financial Statements included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997 remains 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.
For the three months ended March 31, 1998, the Company used $130,634 of cash in
operating activities and incurred a loss of $312,105. From its inception in
March 1985 through March 31, 1998, the Company has incurred a cumulative loss of
$20,018,492. In recent years the Company has relied upon proceeds from private
and public placements of equity securities and loans (some of which were
converted into common stock) in order to fund its operations.
In view of these matters, recoverability of a major portion of the recorded
asset amounts shown in the accompanying balance sheet is dependent upon
continued operation of the Company, which in turn is dependent upon the
Company's ability to succeed in its future operations. The financial statements
do not include any adjustments relating to the recoverability and classification
of liabilities that might be necessary should the Company be unable to continue
in existence.
Management believes that having the Admits for Windows(R) product installed at
several high profile accounts since mid-1997 will improve its ability to sell
the product and expects 1998 sales opportunities to be at least the same as
those experienced in 1997. However, the Company's financial stability has
affected its sales. The Company cannot provide the necessary assurances to
customers that development of products will continue. For this reason, the
Company continues to seek and actively pursue a possible relationship with a
strategic partner who could improve customers' perceptions of the Company's
financial stability as well as the Company's actual financial position. Any such
relationship would probably include an equity investment in the Company. The
Company may also review other financing opportunities.
It should be noted that the Company has been seeking a strategic partner for
approximately one year now, but has been unable to find a suitable partner that
is willing to invest a significant amount of capital on terms that are
acceptable to the Company. Presently, the Company is operating with minimal cash
and current liabilities exceed current assets by $1,772,639 at March 31, 1998.
These circumstances require that the Company exercise greater caution in
conducting its business and, at certain times, take extraordinary measures. In
the past, such measures have included asking certain vendors to extend payment
terms by as much as 120 days, and, on one occasion, delaying payroll for senior
management. Although Management recognizes the critical nature of the Company's
cash position and attempts to
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manage the Company's expenditures accordingly, there is a risk that under
certain conditions, immediate financing could be required. The costs of
obtaining such financing are unknown and the likelihood of obtaining such
financing is uncertain. However, as part of any financing arrangement, the
Company would require a capital infusion in the Company which could result in a
further dilution of the present shareholders' equity interest. Management
believes this is necessary in order to increase the Company's revenues.
Management intends to continue to operate the Company in a conservative manner
through its efforts to further reduce operating expenses and product costs and
to focus on higher margin sales opportunities. While Management believes the
Company will be able to operate without interruption, it intends to continue
discussions with certain potential partners and to seek out additional
candidates who can potentially enhance the Company's financial position and
marketing abilities. However, no assurances can be made that a suitable partner
will be found or that sufficient capital will be raised if necessary to allow
the Company to continue its operations.
On October 30, 1997, the Board of Directors authorized a new series of
convertible preferred stock, par value $.03, designated as Series G Convertible
Preferred Stock ("Series G Shares"). The authorized number of such shares is
8,000. Each share has a face value of $1,000 and is convertible into 4,354
shares of Common Stock (a conversion price of $0.22967 per Common Share).
On November 4, 1997, the Company sold 7,500 shares of Series G Preferred Stock
to RBB Bank, AG as nominee for its clients (who are the beneficial owners of
such shares) for $7,500,000 pursuant to an exemption from the registration
requirements of the Securities Act of 1933, as amended, under Regulation S
promulgated thereunder. The Series G Shares are convertible into 32,655,549
common shares. Pursuant to the transaction, the Company redeemed 7,945 shares of
the company's Series F Preferred Stock for $6 million, leaving the Company with
$1,447,500 of net proceeds after giving effect to expenses of the offering. No
sales commissions were paid.
Under the terms of the subscription agreement, the Company will pay a penalty of
5% of the face value of outstanding Series G Shares ($375,000) if shareholders
have not approved an increase in the authorized number of Common Shares in an
amount sufficient to allow for conversion of all Series G Shares within 120 days
of the subscription agreement (by March 4, 1998). An additional penalty of 10%
will be incurred for each 120 days beyond March 4, 1998, until shareholders
authorize an amendment to the Articles of Incorporation to increase the
authorized number of Common Shares in an amount sufficient to allow for
conversion of all Series G Shares into Common Shares (the "Amendment"). Such
penalties shall be payable in cash. If sufficient cash is not available to
legally pay the penalty, the Company will issue a note payable to the Series G
holders in the amount of the penalty bearing interest at a rate of 20% per
annum.
The penalties described in the preceding paragraph have been temporarily
suspended by the Series G investors on the condition that the Company
expeditiously propose the Amendment to the shareholders at the 1998 Annual
Meeting of shareholders such that the Series G investors will be able to convert
all the Series G shares into common shares. However, the Series G investors may
reinstate these penalties upon sixty days notice. On April 11, 1998, the Company
converted 1,800 of the 7,500 Series G Shares into 7,837,332 common shares.
REVENUE RECOGNITION
Revenues from the sale of equipment and software licenses, which have been
predominately under short-term contracts during the periods presented herein,
are recognized upon the acceptance of the system by the customer provided that
no significant vendor or post-contract support obligations remain outstanding
and collection of the resulting receivable is probable. Revenues from special
sales sold under evaluation periods are recognized at the end of this period.
Revenues from the sale of equipment and software licenses with a planned
installation period exceeding 90 days are accounted for using the percentage of
completion method.
Revenues from post contract customer support and maintenance are recognized
ratably over the maintenance period if collectibility is probable.
7
<PAGE>
CLASSIFICATION OF EXPENSES
Cost of revenues includes the costs associated with the hardware and software
acquired for the Company's customers and the estimated direct costs associated
with the engineering (mostly software customization) and installation of the
system. Cost of revenues also includes the estimated direct cost related to the
support and maintenance of the Company's service contracts as well as
amortization of capitalized software.
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. Options and warrants and the effect
of the convertible securities are not included in the calculation of net loss
per share because they are antidilutive. At March 31, 1998, there were options
and warrants outstanding to purchase 3,009,167 common shares at prices ranging
from $0.24 to $5.50 per share, and 7,500 Series G shares which can convert into
32,655,549 common shares.
NOTE 2 - SYSTEMS AND SOFTWARE COSTS
From June 1996 until June 1997 the Company rewrote its general admission product
in order to make it Windows(R) based. Since June 1997, the Company has been
adding additional features and functions to the product.
As a result of this development effort and new product introduction, the Company
expects to achieve cost reductions in areas of product development and customer
support. In addition, the product has a new appearance which is more user
friendly and allows the user to modify a configuration layer (without access to
the source code) which can remain in place when updating the product to a new
revision level. As a result, the Company expects its new products to be more
competitive in the market.
In the first quarter, 1997, $94,325 of development costs were incurred for the
new general admission product, and the entire amount was capitalized. Since
inception, development costs incurred for the new product total approximately
$544,325 of which $438,325 has been capitalized.
The Company estimates the cost of developing a reserved seating module for the
new product will total approximately $300,000 to $500,000, of which $15,000 has
been incurred, none of which has been capitalized.
NOTE 3 - PRODUCT COST LIABILITY (WARRANTY ALLOWANCE)
An accrued warranty allowance of $551,427 has been provided to cover the cost of
enhancements to be made (free of charge) to systems installed in prior periods
and to provide for Year 2000 compliance of legacy products. During the first
quarter of 1998, $40,356 was spent for these enhancements and subsequently
charged against this allowance. Management has reviewed warranty costs incurred
within the past year, and believes that the accrued warrant allowance is a
conservative estimate of these costs but will continue to monitor them to ensure
they are provided for on a current basis in order to match the cost with
associated revenue.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning around January
1999, these date code fields will need to distinguish twenty-first century dates
from twentieth century dates. As a result, in less than one year, computer
systems and/or software used by many customers may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists in the
software industry concerning the potential effects associated with such
compliance. Although the Company's current products (its new Windows(R) products
and the current version of its reserved seat product, Select-a-Seat) are
designed to be Year 2000 compliant, some legacy products are not Year 2000
compliant. Many versions of non-compliant products have been sold and installed
in the past; however, the terms of their licenses may expire or the customer may
decide to replace their system before any modifications would be necessary.
Thus, some versions may have no impact on the Company, but other versions may
require modifications or upgrades and the resources
8
<PAGE>
required to complete these modifications and upgrades may be substantial.
Additionally, there can be no absolute assurance that the Company's software
products that are designed to be Year 2000 compliant are actually compliant.
Management is currently evaluating the impact of Year 2000 requirements upon the
Company, and developing a plan to limit the Company's exposure and cost of
compliance. Management currently estimates the cost of compliance to be
approximately $100,000 and has provided for this cost as part of its warranty
provision.
NOTE 4 - LEGAL PROCEEDINGS
On June 15, 1995, the Company's founder, former President and Chief Executive
Officer, Donald Turner (and four family members hereinafter referred to as the
"Turners"), commenced an action against the Company, Jeffrey Markowitz and
Richard Friedman in the Circuit Court of Pinellas County, Florida, Civil
Division. Trial is currently set for the week of June 22, 1998. Mr. Turner
alleges, among other things, that he was wrongfully terminated from his
employment and seeks damages that in the aggregate could exceed $1,000,000. The
Company believes Mr. Turner's suit is substantially without merit and intends to
continue vigorously defending the action. Management believes that the outcome
in this matter will not have a material effect on the results of operations of
the Company and an estimated amount has been provided for in the financial
statements. There have been no significant changes regarding this action since
the last quarter.
On or about June 27, 1997, a class action was commenced in the United States
District Court for the Eastern District of New York (CV 97-3775) by Andrew Petit
and Michael A. Lepera, on behalf of themselves individually, and on behalf of
all others similarly situated against inter alia, the Company, Sterling Foster &
Co., Inc. ("Sterling Foster"), the Company's former underwriter, counsel for
Sterling Foster and certain issuer defendants for whom Sterling Foster acted as
underwriter. The Complaint alleges that in connection with an offering of the
Company's securities which became effective on October 17, 1994, Sterling Foster
engaged in a campaign to inflate the price of the Company's stock, to create a
short position at the inflated price and then cover the short position with
shares from shareholders who had been secretly released from "lock-up"
agreements. With respect to the Company, the Complaint alleges that it failed to
disclose in its Registration Statement that prior to the date the offering
became effective, Sterling Foster had secretly agreed to release certain
shareholders from "lock-up" agreements for the purpose of selling their shares
to Sterling Foster at reduced prices. The Plaintiffs' claims allege that the
company violated Sections 11 and 12 (2) of the Securities Act of 1933, Sections
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and Section 349 of the New York General Business Law, and made
negligent misrepresentations. In February 1998 the Company moved to dismiss the
complaint in its entirety. The company believes that it has defenses to these
claims and intends to vigorously defend itself in this action. There have been
no significant changes regarding this action since the last quarter.
The Company is also involved in other legal actions. Management does not believe
that the ultimate resolution of these other matters will have a material effect
on the Company's financial position. However, should the Turners prevail and
obtain a judgment against the Company, the Company would need to obtain
immediate financing of some nature. The costs of such financing are unknown and
the likelihood of obtaining such financing is uncertain.
NOTE - 5 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest And Income Taxes Paid:
Three Months Ended
------------------
1998 1997
------ ----
Interest $1,534 $460
Income taxes -- --
9
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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.
The statements contained in or incorporated by reference into this Quarterly
Report which are not historical facts contain forward looking information with
respect to plans, projections or future performance of the Company, the
occurrence of which involve certain risks and uncertainties that could cause the
Company's actual results to differ materially from those expected by the
Company, including the history of operating losses; uncertainty of future
financial results; possible negative cash flow from operating activities;
additional financing requirements; no assurance of successful and timely
development of new products; risks inherent in software development; customer
acceptance; employee turnover; litigation; dependance on regulatory approvals;
uncertainty of software and hardware pricing or profitability; unpredictability
of patent protection; rapid technological change; competition; and other
uncertainties detailed in the Company's Annual Report on Form 10-KSB.
RESULTS OF OPERATIONS
REVENUES:
Revenues were $1,215,329 and $1,278,576 in the first quarter of 1998 and the
first quarter of 1997 respectively, representing a decrease of $63,247 or 5%.
Product sales represented $1,061,140 and $1,184,595 in the first quarter of 1998
and 1997 respectively and revenue from maintenance and support of existing
customers represented $154,189 and $93,981 in the first quarter of 1998 and 1997
respectively. Revenue from product sales in the first quarter of 1998 includes
$782,000 of revenue recognized on sales of the Admits for Windows(R) product
compared to revenue recognized in the first quarter of 1997 of $881,000 for
Admits for Windows(R) product sales. Revenue from maintenance and support has
increased due to new product sales of Admits for Windows(R) and increased
pricing for maintenance and support.
COST OF REVENUES:
Cost of revenues were $722,764 and $853,299 in the first quarter of 1998 and the
first quarter of 1997 respectively representing a $130,535, or 15%, decrease. As
a percentage of revenues, cost of revenues in the first quarter of 1998 was 59%
of revenues compared to 67% of revenues in the first quarter of 1997. This was
primarily due to the increase in software sales and maintenance and support
revenues without a comparable increase in the costs associated with such sales
and revenues. The ratio of cost of revenues-to-revenues is a function of whether
the sales or services are hardware or software intensive. Hardware sales result
in lower gross margins as hardware is not developed by the Company, but acquired
for customers, as is a small portion of software. Sales of the Company's
software provide the Company with significantly higher gross margins.
DEVELOPMENT COSTS:
Development costs were $25,894 and $132,637 in the first quarter of 1998 and the
first quarter of 1997 respectively representing a decrease of $106,743, or 80%.
Development costs for the first quarter of 1998 do not include $94,325 of
capitalized costs related to the new Admits for Windows(R) product, $24,500 of
costs charged to the warranty allowance, or $31,711 charged to cost of revenues.
Development costs for the first quarter of 1997 do not include $92,090 of
capitalized software costs, $39,608 of costs charged to the warranty allowance,
or $25,669 charged to cost of revenues. With the addition of these amounts,
costs have decreased $113,574 in the first quarter of 1998 compared to the first
quarter of 1997. This represents a 39% decrease, which is due to a significant
reduction in outside contract labor ($9,098 in first quarter 1998 versus
$127,658 in first quarter 1997). In early 1997, the Company used extensive
contract labor associated with development of the new Admits for Windows(R)
software. The Company expects to continue to develop enhancements to its
products for the remainder of 1998. Future development efforts will be focused
on a reserved seating module as soon as resources become available and a
customer is willing to purchase it.
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SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses were $781,835 and $867,083 in the
first quarter of 1998 and the first quarter of 1997 respectively, representing a
$85,248 or 9.8% decrease. The decrease in SG&A expense is primarily attributable
to decreases in travel, employee recruitment, rent (due to Company relocation),
and amortization expenses.
Net loss decreased to $312,105 ($.04 a share) for the first quarter of 1998 from
$562,797 ($.08 a share) for the first quarter of 1997. The components of the
decrease in the Company's net loss are explained above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. In the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997, the Company's auditors qualified their
opinion as to a going concern. The information contained in Note 3 to the
Financial Statements included in the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997 remains 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.
For the three months ended March 31, 1998, the Company used $130,634 of cash in
operating activities and incurred a loss of $312,105. From its inception in
March 1985 through March 31, 1998, the Company has incurred a cumulative loss of
$20,018,492. In recent years the Company has relied upon proceeds from private
and public placements and loans in order to fund its operations.
In view of these matters, recoverability of a major portion of the recorded
asset amounts shown in the accompanying balance sheet is dependent upon
continued operation of the Company, which in turn is dependent upon the
Company's ability to succeed in its future operations. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or amounts and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
During the first quarter of 1998, accounts receivable decreased $184,233
primarily due to increased collection efforts, inventory decreased $ 72,946 due
to fewer installations being in process at March 31, 1998 than at December 31,
1997, and accounts payable decreased $ 154,270 primarily due to the payment of
accrued payroll, payroll taxes and other expenses which were accrued at year
end. The decrease in accrued payroll and payroll taxes arose because the
Company's payroll service provider did not charge the Company for the December
31, 1997 payroll until January 6, 1998. At December 31, 1997 accrued payroll and
payroll taxes were $67,253 and at March 31, 1998 accrued payroll and payroll
taxes were $-0-. All other accounts payable and accrued expenses decreased
$87,017 during the first quarter of 1998.
Since the Company does not purchase components for its products until an order
is received, there is typically a backlog of orders for systems. The Company
defines backlog as a signed contract, typically with some type of financial
assurance such as a deposit. As of March 31, 1998 and December 31, 1997, the
Company's backlog was approximately $566,443 and $880,721, respectively.
11
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Management believes that having the Admits for Windows(R) product installed at
several high profile accounts since mid-1997 will improve its ability to sell
the product and expects 1998 sales opportunities to be at least the same as
those experienced in 1997. However, Management believes that the Company's lack
of financial stability has affected its sales. The company cannot provide the
necessary assurances to customers that development of products will continue.
For this reason, the Company continues to seek and actively pursue a possible
relationship with a strategic partner who could improve customers' perceptions
of the Company's financial stability as well as the Company's actual financial
position. Any such relationship would probably include an equity investment in
the Company. The Company may also review other financing opportunities.
It should be noted that the Company has been seeking a strategic partner for
approximately one year now, but has been unable to find a suitable partner that
is willing to invest a significant amount of capital on terms that are
acceptable to the Company. Presently, the Company is operating with minimal cash
and current liabilities exceed current assets by $1,772,390 at March 31, 1998.
These circumstances require that the Company exercise greater caution in
conducting its business and, at certain times, take extraordinary measures. In
the past, such measures have included asking certain vendors to extend payment
terms by as much as 120 days, and, on one occasion, delaying payroll for senior
management. Although Management recognizes the critical nature of the Company's
cash position and attempts to manage the Company's expenditures accordingly,
there is a risk that under certain conditions, immediate financing could be
required. The costs of obtaining such financing are unknown and the likelihood
of obtaining such financing is uncertain. However, as part of any financing
arrangement, the Company would require a capital infusion in the Company which
could result in a further dilution of the present shareholders' equity interest.
Management believes this is necessary in order to increase the Company's
revenues.
Management intends to continue to operate the Company in a conservative manner
through its efforts to further reduce operating expenses and product costs and
to focus on higher margin sales opportunities. While Management believes the
Company will be able to operate without interruption, it intends to continue
discussions with certain potential partners and to seek out additional potential
candidates who can potentially enhance the Company's financial position and
marketing abilities. However, no assurances can be made that a suitable partner
will be found or that sufficient capital will be raised if necessary to allow
the Company to continue its operations.
12
<PAGE>
Part II-Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: 27.1 Financial Data Schedule.
(b) Reports on Form 8-K: The Company has not filed any reports on Form 8-K
during the quarter ended March 31, 1998.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended March 31, 1998.
13
<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: May 15, 1998 /s/Philip P. Signore
-------------------------
Philip P. Signore
Vice President
Chief Financial Officer
14
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<NAME> LASERGATE SYSTEMS, INC.
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