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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
XXX Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1998
------------------
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.
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(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 91302-3126
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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 file 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 XXX No
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The number of shares outstanding of the issuer's common stock as of
November 2, 1998 was 5,867,729.
Transitional Small Business Disclosure Format (check one):
Yes No XXX
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
FOR THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997
INDEX
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<CAPTION>
PAGE NO.
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet - September 30, 1998 3
Condensed Consolidated Statements of Operations - Three month
periods ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows - Three month
periods ended September 30, 1998 and 1997 5
Notes to the Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Outlook 8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 9
ITEM 5. Other Information 9
ITEM 6. Exhibits and Reports on Form 8-K 9
Signature Page 10
Financial Data Schedule 11
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2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
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ASSETS
Current Assets:
Cash and cash equivalents $ 155,468
Accounts receivable - net 1,022,120
Inventory - net 439,109
Prepaid royalties 1,788,565
Prepaid expenses 143,774
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Total current assets 3,549,036
Property and equipment - net 370,433
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TOTAL ASSETS $ 3,919,469
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,269,691
Accrued royalties 1,316,653
Current portion of capital lease obligations 1,723
Deferred revenues 16,110
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Total current liabilities 2,604,177
Stockholder's Equity:
Common stock - $.001 par value, 20,000,000 shares
authorized, 5,684,891 shares issued and outstanding 5,685
Warrants 559,928
Additional paid-in capital 14,299,932
Accumulated deficit (13,550,253)
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Total stockholders' equity 1,315,292
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,919,469
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See notes to condensed consolidated financial statements.
3
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
Net revenues $1,297,332 $1,065,579
Cost of sales 562,118 405,016
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Gross profit 735,214 660,563
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Operating costs and expenses:
Marketing and sales 766,961 409,945
Compensation in connection with
common stock and common stock
options issued for services
rendered 88,095
Other general and administrative 346,735 427,935
Research and development 420,129 321,076
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Total operating costs and expenses 1,533,825 1,247,051
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Operating loss (798,611) (586,488)
Other income (expense) 4,030 2,273
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Loss before provision for income taxes (794,581) (584,215)
Provision for income taxes 800
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Net loss $ (795,381) $ (584,215)
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Net loss per common share $ (0.14) $ (0.13)
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Weighted average number of common
shares outstanding 5,672,904 4,409,849
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30,
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<CAPTION>
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (795,381) $(584,215)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 43,256 31,159
Common stock and common stock options
issued for services rendered 88,095
Changes in operating assets and liabilities:
Accounts receivable 1,361,012 670,867
Inventories (21,894) (29,886)
Prepaid royalties 77,479 (131,903)
Prepaid expenses and other 61,777 43,766
Accounts payable and accrued expenses (933,468) (157,410)
Accrued royalties (298,509) (44,886)
Deferred revenues (28,890)
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Net cash used by operating activities (534,618) (114,413)
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Cash flows from investing activities-
Purchases of property and equipment (4,560) (4,503)
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Cash flows from financing activities:
Proceeds from issuance of common stock 2,095 180
Payments on capital lease obligations (1,190) (3,099)
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Net cash provided by (used in) financing activities 905 (2,919)
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Net change in cash and cash equivalents (538,273) (121,835)
Cash and cash equivalents, beginning of period 693,741 590,459
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Cash and cash equivalents, end of period $ 155,468 $ 468,624
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Supplement disclosure of cash flow information -
Cash paid during the period for:
Interest $ 1,963 $ 960
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Income taxes $ 0 $ 0
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</TABLE>
See notes to condensed consolidated financial statements.
5
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SOUND SOURCE INTERACTIVE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
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 subsidiaries (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 - ACCOUNTS RECEIVABLE
- ----------------------------
As of September 30, 1998, $868,273 of the accounts receivable balance is due
from MacMillan Digital Publishing (MDP). MDP is the consumer software
distribution unit of Simon & Schuster, Inc. Pursuant to a distribution
agreement between the Company and MDP, MDP will provide distribution,
warehousing and order fulfillment services for all of the Company's products
throughout the United States and Canada.
NOTE C - CASH AND CASH EQUIVALENTS
- ----------------------------------
The Company considers all highly liquid investments with original maturities of
90 days or less to be cash equivalents.
NOTE D - DETERMINATION OF EARNINGS PER SHARE COMPUTATION
- --------------------------------------------------------
In fiscal 1998 the Company adopted the Financial Accounting Standards Board's
SFAS No. 128 "Earnings per Share" ("EPS"). During the three-month periods ended
September 30, 1998 and 1997, the Company incurred a loss from operations.
Accordingly, all potentially dilutive incremental shares are antidilutive and
are therefore excluded from the computations of EPS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Net Sales. Net sales increased by 21.7 percent from $1,065,579 for the three
months ended September 30, 1997 to $1,297,332 for the three months ended
September 30, 1998. Total net sales for the three months ended September 30,
1998 did not include the Company's limited edition entertainment utility
products, which contributed $228,000 to total net sales in the first quarter of
fiscal 1998. This product line was discontinued in the fourth quarter of fiscal
1998. Net sales of children's products increased by approximately $485,000 or
46.4 percent in the first quarter of fiscal 1999 as compared to the first
quarter of fiscal 1998.
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Cost of Sales. Cost of sales increased from 38.0 percent to 43.3 percent during
the three months ended September 30, 1998 as compared to the three months ended
September 30, 1997. This increase is attributable to a higher percentage of
sales of products that were developed by outside developers under royalty based
development agreements rather than fixed fee development agreements.
Marketing and Sales. Marketing and sales expenses increased from $409,945 for
the three months ended September 30, 1997 to $766,961 for the three months ended
September 30, 1998, and increased as a percentage of sales from 38.5 percent to
59.1 percent, respectively. The increase is principally related to a heightened
marketing effort to support new product releases during the quarter and
expansion of the in-house sales team. The Company increased the number of
retail outlets in which its products are sold by approximately 25% over the same
quarter in the prior year.
Research and Development. Research and Development costs increased from
$321,076 during the three months ended September 30, 1997 to $420,129 for the
three months ended September 30, 1998, and increased as a percentage of sales
from 30.1 percent to 32.4 percent, respectively. The increase in costs as a
percentage of sales is primarily attributable to the development of holiday
1998, most of which were not shipped until October 1998. In the prior year, most
of the products for holiday 1997 were completed and shipped in the three months
ended December 31, 1997. The Company anticipates that such costs will continue
to increase in the future as the Company expands the number of products that it
offers for sale, increases the number of features and animation of each of the
products and also as the Company enters into development for additional
platforms which require higher development costs per product.
General and Administrative. General and administrative expenses decreased by
19.0 percent from $427,935 during the three months ended September 30, 1997 to
$346,735 for the three months ended September 30, 1998, and decreased as a
percentage of sales from 40.2 percent to 26.7 percent, respectively. This
decrease in general and administrative expenses is primarily related to
decreased expenditures related to legal fees, utilities, bonuses and stockholder
relations, partially offset by increased depreciation expenses.
Compensation in Connection with Common Stock and Common Stock Options Issued for
Services Rendered. Expenses recorded by the Company in connection with common
stock and common stock options issued for services rendered amounted to $88,095
for the three months ended September 30, 1997 and relate to the vesting of
common stock options issued during fiscal 1994. No such expense was recorded in
the three months ended September 30, 1998 as all of the related options were
fully vested as of June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had working capital of $944,859 in
comparison with $1,683,746 at June 30, 1998, a decrease of $738,887. Cash and
cash equivalents decreased $538,273 directly as a result of the Company
significantly reducing its outstanding accounts payable and due to the loss
incurred during the three month period ended September 30, 1998.
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 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 can be terminated by either party upon 30 days notice. As of
September 30, 1998, the Company had no outstanding borrowings under the
agreement. As of November 2, 1998, the Company borrowed $550,000 under the
agreement.
7
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The Company has experienced a significant increase in growth during the past
two-year period. The Company continues to search for new opportunities to
obtain licenses, develop and sell products, and to purchase products that are at
or near completion of development. Additionally, the Company is seeking new and
innovative ways to deliver its products to consumers, some of which may require
large up-front cash resources. If the Company enters into agreements in such
business opportunities in the future, the Company may require additional
financing to fund its growth.
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 Reports 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. Consumers ultimately determine the success of consumer
software products. Not every product will obtain consumer acceptance and have
sell through rates sufficient to recover manufacturing, development and
marketing costs associated with the product. If consumer acceptance is not
achieved, the Company may be required to abandon capitalized development costs
and guaranteed royalty payments and may be required to destroy excess inventory.
The Company records a reserve for product returns based upon its prior
experience in the consumer software market and on current market conditions,
including sell-through information obtained from retailers. There can be no
assurance that future actual returns will not exceed the reserved amounts at
September 30, 1998.
Competition. The market for the Company's consumer software products is
intensely and increasing competitive. Existing consumer software companies may
broaden their product lines to compete with the Company's products, and
potential new competitors may enter or increase their focus on the consumer
software market, resulting in even greater competition for the Company. Many of
the companies with which the Company currently competes have greater financial,
technical, marketing and sales resources, as well as greater name recognition
and better access to consumers, than the Company. There can be no assurance
that the Company will have the resources required to respond effectively to
market or technological changes or to compete successfully in the future. In
addition, increasing competition in the consumer software market may cause
prices to fall, which may materially adversely affect the Company's business,
operating results and financial condition.
8
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Dependence on Retailers. The Company's retail customers include computer
stores, office supply stores, warehouse clubs, consumer electronic stores,
bookstores, video stores and alternative channels. The Company's customers are
not contractually required to make future purchases of the Company's products
and therefore discontinue carrying the Company's products in favor of
competitors' products or for any other reason. Due to increased competition for
limited shelf space, retailers are increasingly in a better position to
negotiate favorable purchase terms, including price discounts, co-operative
marketing costs and product return policies. There can be no assurance that the
Company will be able to increase or sustain its current amount of retail shelf
space or promotional resources.
Licensed Properties. There is a risk factor inherent in any venture involving
licensed properties. Not every licensed product is guaranteed success; only the
software consumer can ultimately determine the outcome. Additionally, there is
no guarantee that the Company can obtain future licenses of either the quality
or the quantity necessary for the Company to reach its goals.
Fluctuations in Operating Results; Seasonality. The Company has experienced,
and may continue to experience, fluctuations in operating results due to a
variety of factors, including the size and rate of growth of the consumer
software market, market acceptance of the Company's products, the release of new
products, consumer purchasing trends related to seasonality, and the timing of
the receipt of orders from major customers. The Company's expense levels are
based, in part, on its expectations as to future sales. Therefore, operating
results could be disproportionately affected by a reduction in sales or a
failure to meet the Company's sales expectations.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its officers and directors have been, and in the future the
Company and /or its officers and directors may be involved in suits and actions
incidental to the Company's business.
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.
9
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act13, the
Registrant caused this report to be signed on its behalf by the undersigned13,
thereunto duly authorized.
SOUND SOURCE INTERACTIVE13, INC.
By: /s/Vincent J. Bitetti Date: November 13, 1998
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Vincent J. Bitetti
Chairman and Chief Executive Officer
(Principal Executive Officer)
By: /s/Ulrich E. Gottschling Date: November 13, 1998
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Ulrich E. Gottschling
President1313, Chief Operating Officer1313,
Chief Financial Officer1313, Treasurer and Corporate Secretary
(Chief Financial Officer)
10
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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, 1998 THROUGH SEPTEMBER
30, 1998 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-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 155,468
<SECURITIES> 0
<RECEIVABLES> 1,044,630
<ALLOWANCES> (22,510)
<INVENTORY> 439,109
<CURRENT-ASSETS> 3,549,036
<PP&E> 714,183
<DEPRECIATION> (343,750)
<TOTAL-ASSETS> 3,919,469
<CURRENT-LIABILITIES> 2,604,177
<BONDS> 0
0
0
<COMMON> 5,685
<OTHER-SE> 1,309,607
<TOTAL-LIABILITY-AND-EQUITY> 1,315,292
<SALES> 1,297,332
<TOTAL-REVENUES> 1,297,332
<CGS> 562,118
<TOTAL-COSTS> 1,533,825
<OTHER-EXPENSES> 5,993
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,963
<INCOME-PRETAX> (794,581)
<INCOME-TAX> 800
<INCOME-CONTINUING> (795,381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (795,381)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
