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 JUNE 30, 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.
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(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)
2189 CLEVELAND STREET, CLEARWATER, FLORIDA 33765
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(Address of principal executive office) (Zip Code)
ISSUER'S TELEPHONE NUMBER: (727) 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 AUGUST 7, 1998
- ----- -----------------------------
COMMON STOCK $0.03 PAR VALUE 15,299,393
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE) YES [ ] NO [X]
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LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1998
INDEX
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PAGE
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Part I. FINANCIAL INFORMATION
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Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations 4
(unaudited) for the three months and six months ended
June 30, 1998 and 1997
Consolidated Statements of Cash Flows 5
(unaudited) for the six months ended
June 30, 1998 and 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 14
Signature 15
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<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 112,560 $ 390,762
Accounts receivable, net of allowances
of $152,214 and $157,690 131,919 455,001
Note receivable, current portion 50,251 50,251
Inventories 109,845 232,192
Prepaid expenses 30,793 30,838
------------ ------------
Total current assets $ 435,368 $ 1,159,044
Property and equipment, net 228,743 305,509
Note receivable, long-term portion 59,091 59,091
Systems and software costs, net of amortization of $1,662,753
and $1,611,753 628,674 475,491
Goodwill, net of amortization of $465,052 and $398,557 2,183,222 2,249,716
Other assets, net 24,324 19,137
------------ ------------
Total Assets $ 3,559,422 $ 4,267,988
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable, bank $ 22,222 $ 23,575
Accounts payable, trade 740,322 780,271
Deferred revenues 362,739 356,471
Accrued warranty costs 549,760 554,497
Accrued expenses 883,715 912,190
------------ ------------
Total current liabilities 2,558,758 2,627,004
------------ ------------
Total liabilities 2,558,758 2,627,004
Stockholders' equity:
Preferred stock, $.03 par value, 2,000,000
shares authorized, 7,500 shares
issued and outstanding at June 30,
1998 and December 31, 1997, respectively 225 225
Common stock, $.03 par value, 20,000,000
shares authorized, 15,299,393 and
7,462,061 issued and outstanding at
June 30, 1998 and December 31, 1997 223,862 223,862
Additional paid-in capital 21,123,284 21,123,284
Accumulated deficit (20,346,707) (19,706,387)
------------ ------------
Total stockholder's equity 1,000,664 1,640,984
------------ ------------
Total liabilities and Stockholders' Equity $ 3,559,422 $ 4,267,988
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 762,669 $ 1,025,888 $ 1,977,998 $ 2,304,464
Operating Expenses:
Cost of revenues 415,442 947,766 1,138,206 1,801,066
Development 18,934 77,048 44,828 209,685
Selling, general and administrative 662,365 796,831 1,444,200 1,663,914
------------ ------------ ------------ ------------
Operating Loss (334,072) (795,757) (649,236) (1,370,201)
Other income (expense) 5,857 6,879 8,916 18,525
------------ ------------ ------------ ------------
Net Loss $ (328,215) $ (788,878) $ (640,320) $ (1,351,676)
============ ============ ============ ============
Net loss per common share ($0.02) ($0.11) ($0.06) ($0.18)
Weighted Average Common
Stock Outstanding 14,438,148 7,462,061 10,969,375 7,447,617
</TABLE>
The accompanying notes are an integral part of these statements.
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<TABLE>
<CAPTION>
Lasergate Systems, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED,
-----------------------------------
JUNE 30, 1998 JUNE 30, 1997
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<S> <C> <C>
Cash flow from operating activities:
Net Loss $ (640,320) $(1,351,676)
Adjustments to reconcile net loss
To cash used in operating activities:
Depreciation of property and equipment 84,462 70,347
Amortization of intangibles 117,494 143,322
Increase (decrease) in provision for doubtful accounts (10,396) 2,355
Decrease (increase) in:
Accounts receivables, trade 337,639 152,972
Inventories 122,348 127,829
Prepaid Expenses (4,117) (41,541)
Other (5,187) 82,629
Notes receivable plus accrued expenses (148,477)
Increase (decrease) in:
Accounts payable and accrued expenses (68,425) 19,192
Accrued product cost (4,737) (36,981)
Deferred revenue 6,269 (524,344)
----------- -----------
Net cash used in operating activities $ (64,970) $(1,504,373)
----------- -----------
Cash flow from investing activities:
(Additions) to, disposal of, property and equipment (7,696) (96,738)
Capitalized software development cost (204,183) (185,565)
----------- -----------
Net cash used in investing activities (211,879) (282,303)
----------- -----------
Cash flows from financing activities:
Repayment of loans, other (1,353) (2,471)
----------- -----------
Net increase (decrease) in cash and cash equivalents (278,202) (1,789,147)
Cash and cash equivalents, beginning of period 390,762 $ 1,924,825
----------- -----------
Cash and cash equivalents, end of period $ 112,560 $ 135,678
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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LASERGATE SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1 - FINANCIAL STATEMENT PRESENTATION AND OTHER INTERNAL PRESENTATION
INTERIM 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 as amended, 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 as
amended, 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 as amended, 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 six months ended June 30, 1998, the Company used $64,970 of cash in
operating activities and incurred a loss of $640,320. From its inception in
March 1985 through June 30, 1998, the Company has incurred a cumulative loss of
$20,346,707. In recent years the Company has relied upon proceeds from private
and public placements of equity securities (some of which were converted into
common stock) 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 of assets 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 approximately 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
over one year, 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 $2,123,390 at June 30, 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
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payment terms by as much as 120 days. 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 a
capital infusion 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
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 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 is to pay a penalty
of 5% of the face value of outstanding Series G Shares ($375,000) if
shareholders do not approve 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). Under the
terms of the subscription agreement, an additional penalty of 10% is to 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. As of the date hereof, the
Company has not held it 1998 Annual Meeting of shareholders and the investors
have not made a demand to reinstate the penalties. 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.
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Revenues from post contract customer support and maintenance are recognized
ratably over the maintenance period if collectibility is probable.
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 June 30, 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 5,700 Series G shares which can convert into
24,818,217 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 second quarter, 1998, $109,858 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
$654,183 of which $548,183 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 $549,760 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. For the six months
ending June 30, 1998, $50,165 was spent for these enhancements and subsequently
charged against the warranty allowance. Management has reviewed warranty costs
incurred within the past year, and believes this provision 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
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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 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 stated above.
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. Mr. Turner alleged, among other things, that he was wrongfully
terminated from his employment and sought damages that in the aggregate could
have exceeded $1,000,000. Trial was set for the week of June 22, 1998, but all
parties agreed to a full settlement amount of $312,500 without a trial. Mr.
Friedman and Mr. Markowitz paid $150,000 and Lasergate Systems, Inc. paid
$150,000 on July 31, 1998 using outside funding obtained from RBB Bank, AG. The
remaining balance of $12,500 is payable by Lasergate Systems, Inc. on December
31, 1998.
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.
NOTE 5 - NOTES PAYABLE
On July 31, 1998 the Company borrowed $300,000 from RBB Bank. The loan is
payable in one (1) year at an interest rate of 10% per annum. The loan also
included issuance of 300,000 stock warrants, on terms to be agreed upon, and is
secured by Admits source code.
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NOTE 6 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
INTEREST AND INCOME TAXES PAID:
SIX MONTHS ENDED
----------------------
1998 1997
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Interest $2,122 $1,534
Income taxes - 0 - - 0 -
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
THREE MONTHS ENDED JUNE 30, 1988 VERSUS THREE MONTHS ENDED JUNE 30, 1997
REVENUES:
Revenues were $ 762,669 and $1,025,888 in the second quarter of 1998 and the
second quarter of 1997 respectively, representing a decrease of $263,219 or 26%.
Product sales represented $625,747 and $913,636 in the second quarter of 1998
and 1997 respectively and revenue from maintenance and support of existing
customers represented $136,922 and $112,252 in the second quarter of 1998 and
1997 respectively. Revenue from product sales in the second quarter of 1998
includes $503,785 of revenue recognized on sales of the Admits for Windows(R)
licenses and hardware compared to revenue recognized in the second quarter of
1997 of $483,879 for Admits for Windows(R) licenses and hardware sales.
COST OF REVENUES:
Cost of revenues were $415,442 and $947,766 in the second quarter of 1998 and
the second quarter of 1997 respectively representing a $532,324, or 56%,
decrease. As a percentage of revenues, cost of revenues in the second quarter of
1998 was 54% of revenues compared to 92% of revenues in the second quarter of
1997. This was primarily due to the increase in software sales relative to
hardware sales. 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.
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DEVELOPMENT COSTS:
Development costs were $18,934 and $77,048 in the second quarter of 1998 and the
second quarter of 1997 respectively, representing a decrease of $58,114, or 75%.
Development costs for the second quarter of 1998 do not include $109,858 of
capitalized costs related to the new Admits for Windows(R) product, $9,800 of
costs charged to the warranty allowance, or $22,484 charged to cost of revenues.
Development costs for the second quarter of 1997 do not include $93,910 of
capitalized software costs, $55,392 of costs charged to the warranty allowance,
or $25,669 credited to cost of revenues. 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 customer demands justify.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses were $662,365 and $796,831 for the
second quarter of 1998 and 1997 respectively, representing a $134,466 or 17%
decrease. The decrease in SG&A expense is primarily attributable to decreases in
salary expense, travel, employee recruitment, rent (due to Company relocation),
and amortization expenses.
Net loss decreased to $328,215 ($0.02 a share) for the second quarter 1998 from
$788,878 ($0.11 a share) for the second quarter 1997. The components of the
decrease in the Company's net loss are explained above.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997
REVENUES:
Revenues were $1,977,998 and $2,304,464 for the six months ended June 30, 1998
and 1997 respectively, representing a decrease of $326,466 or 14%. Product sales
represented $1,644,516 and $2,094,342 for the six months ended June 30, 1998 and
1997 respectively and revenue from maintenance and support of customers
represented $333,482 and $210,122 for the six months ended June 30, 1998 and
1997 respectively. Revenue from product sales for the six months of 1998
includes $1,278,785 of revenue recognized on sales of Admits for Windows(R)
licenses and hardware compared to revenue recognized in the six months of 1997
of $1,364,979 for Admits for Windows(R) licenses and hardware sales.
COST OF REVENUES:
Cost of revenues were $1,138,206 and $1,801,066 in the six months ended June 30,
1998 and 1997 respectively, representing a $662,860, or 37%, decrease. As a
percentage of revenues, cost of revenues decreased to 58% from 78% for the first
six months ended June 30, 1998. This was primarily due to the increase in
software sales relative to hardware sales and increases in maintenance and
support revenues without a comparable increase in the costs associated with such
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 $44,828 and $209,685 for the six months ended June 30,
1998 and 1997 respectively, representing a decrease of $164,857, or 79%.
Development costs for six months ended June 30, 1998 do not include $204,183 of
capitalized costs related to the new Admits for Windows(R) product, $34,300 of
costs charged to the warranty allowance, or $54,195 charged to cost of revenues.
Development costs for the six months ended June 30, 1997 do not include $186,000
of capitalized software costs, $95,000 of costs charged to the warranty
allowance. With the addition of these amounts, costs have decreased $153,179 for
the six months ended June 30, 1998 compared to the six months
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ended June 30, 1997. This represents a 31% decrease, which is primarily due to a
reduction in outside contract labor ($9,705 for the six months ended June 30,
1998 versus $127,658 for the six months ended June 30, 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 customer demands justified.
SELLING, GENERAL AND ADMINISTRATIVE:
Selling, general and administrative expenses were $1,444,200 and $1,663,914 for
the six months of 1998 and 1997 respectively, representing a $219,714 or 13%
decrease. The decrease in SG&A expense is primarily attributable to decreases in
salary expense, travel, employee recruitment, rent (due to Company relocation),
and amortization expenses.
Net loss decreased to $640,320 ($0.06 a share) for the six months ended June 30,
1998 from $1,351,676 ($0.18 a share) for the six months ended June 30, 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 six months ended June 30, 1998, the Company used $64,970 of cash in
operating activities and incurred a loss of $640,320. From its inception in
March 1985 through June 30, 1998, the Company has incurred a cumulative loss of
$20,346,707. 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 half of 1998, accounts receivable decreased $323,082 primarily
due to increased collection efforts. Inventory decreased $122,347 due to fewer
installations being in process at June 30, 1998 than at December 31, 1997.
Accounts payable decreased $ 39,949 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 June 30, 1998 accrued payroll and payroll taxes were
$-0-. All other accounts payable and accrued expenses decreased $29,015 during
the first six months 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 June 30, 1998 and December 31, 1997, the
Company's backlog was approximately $871,930 and $880,721, respectively.
-12-
<PAGE>
The penalties described on page 7, paragraph 5, 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 for 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.
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 of approximately 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
over 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 $2,123,390 at June 30, 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. 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. 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.
-13-
<PAGE>
PART II-OTHER INFORMATION
Item 1 - 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. Mr. Turner alleged, among other things, that he was wrongfully
terminated from his employment and sought damages that in the aggregate could
have exceeded $1,000,000. Trial was set for the week of June 22, 1998, but all
parties agreed to a full settlement amount of $312,500 without a trial. Mr.
Friedman and Mr. Markowitz paid $150,000 and Lasergate Systems, Inc. paid
$150,000 on July 31, 1998 using outside funding obtained from RBB Bank, AG. The
remaining balance of $12,500 is payable by Lasergate Systems, Inc. on December
31, 1998.
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 June 30, 1998.
All other items required in Part II have been previously filed or are not
applicable for the quarter ended June 30, 1998.
-14-
<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 7, 1998 /s/ ALFRED P. JONES
-----------------------
Alfred P. Jones
Vice President
Chief Financial Officer
-15-
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 112,560
<SECURITIES> 0
<RECEIVABLES> 284,133
<ALLOWANCES> 152,214
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<CURRENT-ASSETS> 435,368
<PP&E> 515,459
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225
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<SALES> 1,977,998
<TOTAL-REVENUES> 1,977,998
<CGS> 1,138,206
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<INCOME-PRETAX> (640,320)
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