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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1997
---------
Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from __________ to __________
Commission file number 0-28604
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SOUND SOURCE INTERACTIVE, INC.
- -----------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 95-426046
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
26115 MUREAU ROAD, SUITE B, CALABASAS, CALIFORNIA 91302
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(Address of Principal Executive Offices)
(818) 878-0505
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(Issuer's Telephone Number, Including Area Code)
__________________________________________________________________________
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the 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
___ ___________
The number of shares outstanding of the issuer's common stock as of October
31, 1997 was 4,412,099
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Transitional Small Business Disclosure Format (check one):
Yes No X
_________ ___
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 1997 AND 1996
INDEX
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PAGE NO.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet - September 30, 1997 3
Condensed Consolidated Statements of Operations--Three-month
periods ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows--Three-month
periods ended September 30, 1997 and 1996 5
Notes to the Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Outlook 9
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PART II - OTHER INFORMATION
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ITEM 1. Legal Proceedings 10
ITEM 5. Other Information 10
ITEM 6. Exhibits and Reports on Form 8-K 10
Signature Page 11
Financial Data Schedule 12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
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ASSETS
Current Assets:
Cash and cash equivalents $ 468,624
Accounts receivable - net 690,249
Inventory - net 258,563
Prepaid royalties 1,750,466
Prepaid expenses 34,107
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Total current assets 3,202,009
Property and equipment - net 387,799
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Other assets 14,553
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TOTAL ASSETS $ 3,604,361
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 917,873
Accrued compensation and related taxes 252,976
Accrued royalties 1,628,855
Current portion of capital lease obligations 8,991
Deferred revenues 12,000
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Total current liabilities 2,820,695
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Capital lease obligations, net of current portion 1,722
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Stockholder's Equity:
Common stock - $.001 par value,
20,000,00 shares authorized, 4,412,099 shares
issued and outstanding 4,413
Warrants 1,104,925
Additional paid-in capital 13,512,893
Accumulated deficit (13,840,287)
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Total stockholders' equity 781,944
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,604,361
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See accompanying notes to condensed consolidated financial statements.
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SOUND SOURCE INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
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1997 1996
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Net sales $1,065,579 $ 919,856
Cost of sales 405,016 392,615
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Gross profit 660,563 527,241
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Operating costs and expenses:
Marketing and sales 409,945 279,703
Compensation in connection with
common stock and common stock
options issued for services
rendered 88,095 89,303
Other general and administrative 427,935 350,824
Research and development 321,076 267,422
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Total operating costs and expenses 1,247,051 987,252
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Operating loss (586,488) (460,011)
Other income 2,273 12,260
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Net loss $ (584,215) $(447,751)
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Net loss per common share $ (0.13) $ (0.10)
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Weighted average number of common
shares outstanding 4,409,849 4,265,215
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See accompanying notes to condensed consolidated financial statements.
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
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1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (584,215) $ (447,751)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 31,159 19,445
Allowance for sales returns -- 144,960
Allowance for inventories -- 18,683
Common stock and common stock options
issued for services rendered 88,095 89,303
Changes in operating assets and liabilities:
Accounts receivable 670,867 3,036
Inventories (29,886) 8,281
Prepaid royalties (131,903) (7,908)
Prepaid expenses and other 43,766 (100,933)
Accounts payable and accrued expenses (137,627) (408,227)
Accrued compensation and related taxes (19,783) 47,707
Accrued interest -- (367,695)
Accrued royalties (44,886) 117,069
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Net cash used by operating activities (114,413) (884,030)
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Cash flows from investing activities-
Purchases of property and equipment (4,503) (244,091)
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Cash flows from financing activities:
Proceeds from issuance of common stock 180 7,948,372
Proceeds from issuance of warrants -- 341,575
Repayment of notes payable -- (4,987,500)
Deferred offering costs -- 620,904
Payments on capital lease obligations (3,099) (6,562)
Repayment of short term advance -- (400,000)
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Net cash (used in) provided by financing activities (2,919) 3,516,789
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Net change in cash and cash equivalents (121,835) 2,388,668
Cash and cash equivalents, beginning of period 590,459 181,985
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Cash and cash equivalents, end of period $ 468,624 $2,570,653
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See accompanying notes to condensed consolidated financial statements.
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30,
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1997 1996
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Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 960 $375,748
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Income taxes $ 0 $ 0
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Supplemental disclosure of noncash investing and financing activities:
During the three-month period ended September 30, 1996, the Company issued
2,016,657 warrants in connection with the conversion of a note payable to
related party in the amount of $500,000 and accrued interest thereon in the
amount of $4,164.
See accompanying notes to condensed consolidated financial statements.
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and therefore do not
include all information and notes necessary for a fair presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The unaudited condensed consolidated financial
statements include the accounts of Sound Source Interactive, Inc. and its wholly
owned subsidiary (collectively referred to as the Company). The operating
results for interim periods are unaudited and are not necessarily an indication
of the results to be expected for the full fiscal year. In the opinion of
management, the results of operations as reported for the interim period reflect
all adjustments which are necessary for a fair presentation of operating
results.
NOTE B -ROYALTIES
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The Company enters into license agreements with movie studios, actors and sound
developers for recognized movie and television properties, which require the
Company to pay upfront minimum guarantees against future royalties. The license
agreements generally require the Company to pay a percentage of sales of the
products but no less than a specified amount (the minimum guaranteed royalty).
The Company records the minimum guaranteed royalty as a liability and a related
asset at the time the agreement is consummated. The liability is extinguished as
payments are made to the license holders and the asset is expensed at the
contractual royalty rate based on actual net product sales. Royalty liabilities
in excess of the minimum guaranteed amount are recorded when such amounts are
earned by the licensor.
NOTE C - ACCOUNTS RECEIVABLE AND SHORT TERM ADVANCE
- ---------------------------------------------------
During the three-month periods ended September 30, 1997 and 1996, $839,285 and
$819,818 respectively of the Company's net sales were generated by or through
Simon & Schuster Interactive Distribution Services (SSIDS). As of September 30,
1997, $564,720 of the accounts receivable balance is due from SSIDS. SSIDS is
the consumer software distribution unit of Simon & Schuster, Inc., the
publishing operation of Viacom, Inc. Pursuant to a distribution agreement
between the Company and SSIDS, SSIDS provides distribution, warehousing and
order fulfillment services for all of the Company's products throughout the
United States and Canada.
NOTE D - CASH AND CASH EQUIVALENTS
- ----------------------------------
The Company considers all highly liquid investments with original maturities of
90 days or less to be cash equivalents.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net Sales. Net sales increased by 15.8 percent from $919,856 for the three
months ended September 30, 1996 to $1,065,579 for the three months ended
September 30, 1997. This increase is primarily attributable to increased
distribution of the Company's products within the North American retail channel.
The Company introduced one new product during the three months ended September
30, 1997, as compared to four new products introduced during the three months
ended September 30, 1996. During the three months ended December 31, 1997, the
Company plans to introduce five new products, including its first interactive
video game. The Company began receiving payments during the three months ended
September 30, 1997 from IONA Software, Ltd., the Company's exclusive distributor
of localized foreign
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language products, and continued receiving revenues from alternative sources
such as unlocking of encrypted CD-ROMS. The Company believes that revenues
associated with alternative sources, such as localized product sales, unlocking
of encrypted CD-ROMs, direct mail, and coupons will increase during the three
months ended December 31, 1997
Cost of Sales. Cost of sales increased by 3.2 percent from $392,615 for the
three months ended September 30, 1996 to $405,016 for the three months ended
September 30, 1997. However, cost of sales as a percentage of sales decreased
from 42.7 percent to 38.0 percent during these respective periods. The increase
in total cost of sales is due to the above noted 15.8 percent increase in
revenues offset partially by reduced replication and royalty costs. During the
three months ended September 30, 1996, a significant portion of the Company's
revenues was derived from the sale of one product which had a higher royalty
rate than the Company's current/newer products which resulted in a higher cost
of goods amount as compared to the current period. The Company anticipates that
the royalty percentage for the three-month period ended December 31, 1997 may
increase due to sales from one of the Company's new products which has a higher
than normal royalty rate. Additionally during the three months ended September
30, 1997, the Company recognized $82,095 of revenues from one of its
international distributors for which cost of goods sold is limited to royalty
costs.
Marketing and Sales. Marketing and sales expenses increased by 46.6 percent from
$279,703 for the three months ended September 30, 1996 to $409,945 for the three
months ended September 30, 1997, and increased as a percentage of sales from
30.4 percent to 38.5 percent, respectively. The change in dollar amount is
principally related to marketing and sales efforts to support the new product
that the Company released during the three months ended September 30, 1997, as
well as a significant increase in marketing related to products expected to be
released during the three months ended December 31, 1997. The Company
anticipates that certain of the marketing and sales costs associated with the
introduction of new products will result in sales of performing products
continuing beyond the initial launch period, although there can be no assurance
such will occur.
Research and Development. Research and Development costs increased 20.0 percent
from $267,422 during the three months ended September 30, 1996 to $321,076 for
the three months ended September 30, 1997, and increased as a percentage of
sales from 29.1 percent to 30.1 percent, respectively. These increases were
primarily attributable to continued development costs of the five products that
the Company is introducing during the three month period ended December 31,
1997, the continued development of one of the Company's interactive video games,
and development of other products anticipated to be released during the first
six months of calendar 1998.
General and Administrative. General and administrative expenses increased by
17.2 percent from $440,127 during the three months ended September 30, 1996 to $
516,030 for the three months ended September 30, 1997, and increased as a
percentage of sales from 47.8 percent to 48.4 percent, respectively. These
increases were primarily due to legal expenses related to the Company's lawsuit
against Acclaim Distribution, Inc., increased depreciation expense and increased
compensation costs related to accrued bonuses. Included in general and
administrative expenses for the three months ended September 30, 1997 and 1996
is $88,095 and $89,303, respectively, related to compensation expense in
connection with common stock and common stock options issued for services
rendered.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of $381,314 in
comparison with $851,290 at June 30, 1997, a decrease of $469,976. Cash and
cash equivalents decreased $121,835 primarily as a result of losses incurred by
the Company during the three months ended September 30, 1997 and payment of
royalties offset partially by collection of accounts receivable.
During September 1997, the Company entered into a factoring agreement with
Silicon Valley Financial Services, a division of Silicon Valley Bank. The
factoring agreement provides the Company with
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borrowing availability of up to 85% of the Company's qualified gross domestic
accounts receivable, not to exceed $1,500,000 in the aggregate, at a rate of
1.75% per month of the average gross daily factoring account balance. The credit
is secured by all the assets of the Company and matures one year from the date
of the agreement. The Company made its first borrowings under this agreement in
November, 1997.
The Company expects to meet its cash requirements out of its cash reserves, cash
inflows generated from operating activities, and borrowings under the
aforementioned factoring agreement during the foreseeable future.
OUTLOOK
The statements contained in this report on Form 10-QSB that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include, but are not limited to: statements regarding the Company's sales and
future revenues, statements regarding future research and development costs and
products, and statements regarding the future flexibility of the Company's cash
reserves. All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes
no obligation to update any such forward-looking statement. It is important to
note that the Company's actual results could differ materially from those in
such forward-looking statements. Among the factors that could cause actual
results to differ materially are the factors detailed below. Please consult the
risk factors listed from time to time in the Company's reports on Form 10-QSB
and 10-KSB and Annual Report to Stockholders.
Sound Source Interactive, Inc. does not provide forecasts of potential future
financial performance. While management of the Company is optimistic about the
Company's long-term prospects, the following issues and uncertainties, among
others, should be considered in evaluating its growth outlook.
Consumer Preferences and Product Returns. Consumers ultimately determine the
success of software products. Not every product will be a hit and residual
inventory may exist depending on actual sell through. Games, in particular, can
have very wide degrees of success or failure in terms of customer acceptance.
The Company is entering the Game market for the first time during the three-
month period ending December 31, 1997. Actual sell through of the games
published by the Company can not be determined as of this time. The Company
records a reserve for returns based upon its prior experience and current market
conditions. There can be no assurance that its actual losses due to returns will
not exceed the reserved amount.
Product Ship Schedules. Delays on product ship schedules can cause problems
with product fulfillment, revenue recognition and retailer orders.
Employment of Vincent J. Bitetti. Vincent J. Bitetti, Chairman of the Board and
Chief Executive Officer of the Company, is employed under an employment
agreement which expires on September 15, 1998. The Company's success depends to
a significant extent on the performance and continued service of its senior
management and certain key employees. In particular, the loss of the services of
Vincent J. Bitetti without appropriate planning could have a material adverse
effect on the Company. In addition to his duties as Chairman of the Board and
Chief Executive Officer, Mr. Bitetti is the executive producer of all Company
products, conceptualizes, reviews and "green lights" all title development, and
has led the negotiations for all studio license and promotional/partnership
agreements.
Distribution Channels. Traditional retail distribution channels have been
experiencing a major restructuring and are fostering the development of
alternative distribution outlets. The Company intends to explore new and
innovative distribution methods, the success of which cannot be assured.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its officers and directors are, and in the future the Company
and/or its officers and directors could be, involved in suits and actions
incidental to the Company's business. The Company does not believe that the
resolution of any of the current suits or actions will result in any material
adverse effect on the financial condition or operations of the Company.
On December 13, 1996, the Company filed suit in Superior Court for the County of
Los Angeles, California, against Acclaim Distribution Inc. seeking compensatory
damages of at least $2,124,259 and consequential damages of at least $20,000,000
arising out of Acclaim's alleged breach of its exclusive worldwide distribution
agreement with the Company and other related matters. This action is scheduled
for trial commencing February 1998.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Description of Exhibit
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27 Financial Data Schedule, filed herewith
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SOUND SOURCE INTERACTIVE, INC.
By: /s/Vincent Bitetti Date: November 13, 1997
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Vincent Bitetti
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/Ulrich E. Gottschling Date: November 13, 1997
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Ulrich E. Gottschling
President, Chief Operating Officer,
Chief Financial Officer, Treasurer and Corporate Secretary
(Chief Financial Officer)
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUND SOURCE
INTERACTIVE, INC. AND SUBSIDIARY FOR THE PERIOD JULY 1, 1997 TO SEPTEMBER 30,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 468,624
<SECURITIES> 0
<RECEIVABLES> 1,393,670
<ALLOWANCES> (703,421)
<INVENTORY> 258,563
<CURRENT-ASSETS> 3,202,009
<PP&E> 656,920
<DEPRECIATION> (269,121)
<TOTAL-ASSETS> 3,604,361
<CURRENT-LIABILITIES> 2,820,695
<BONDS> 0
0
0
<COMMON> 4,413
<OTHER-SE> 777,531
<TOTAL-LIABILITY-AND-EQUITY> 3,604,361
<SALES> 1,065,579
<TOTAL-REVENUES> 1,065,579
<CGS> 405,016
<TOTAL-COSTS> 1,247,051
<OTHER-EXPENSES> 2,273
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 960
<INCOME-PRETAX> (584,215)
<INCOME-TAX> 0
<INCOME-CONTINUING> (584,215)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (584,215)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
