UNITED STATES SECURITIES AND EXCHANGES COMMISSION
Washington D.C. 20549
------------------------
Form 10-QSB
(Mark One)
[ 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 or
[ ] 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 33-86242
ProtoSource Corporation
-----------------------
(exact name of registrant as specified in its charter)
California 77-0190772
---------- ----------
(State of other jurisdiction of (IRS Employer
Incorporation of organization) Identification No.)
2300 Tulare Street, Suite 210
Fresno, California 93721-2226
-----------------------------
(address of principal executive offices, zip code)
Registrant's telephone number, including area code: (209) 490-8600
----------------------
Indicated by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
----- -----
There are 1,802,333 shares of the registrant's common stock, no par value
outstanding on July 31, 1998.
<PAGE>
ProtoSource Corporation
Index
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Page
----
Part I Financial Information
Item 1. Financial Statements
Condensed Balance Sheet at June 30,1998 3
Condensed Statements of Operations
for the three months ended June 30,1998 and 1997 5
Condensed Statements of Operations
for the six months ended June 30,1998 and 1997 6
Condensed Statements of Cash Flows
for the six months ended June 30,1998 and 1997 7
Notes to Condensed Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Part II. Other Information
Other Information 13
Signatures 13
When used in this report, the words "estimate," "project," "intend," "believe"
and "expect" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risk and uncertainties that could
cause actual results to differ materially, including competitive pressures, new
product introductions by the Company and its competitors and changes in the
rates of subscriber acquisition and retention. Readers are cautioned not to
place undue reliance on these forward-lookin statements, which speak only as of
the date hereof. The Company undertakes no obligation to publicly release
updates or revisions to these statements.
2
<PAGE>
ProtoSource Corporation
Condensed Balance Sheet
June 30, 1998
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 4,363,776
Accounts receivable:
Trade net of allowance for doubtful
accounts of $7,500 26,060
Other 82,000
Current portion of note receivable 33,000
-----------
Total current assets 4,504,836
-----------
Property and equipment, at cost:
Leasehold improvements 2,956
Equipment 864,261
Furniture 114,203
-----------
981,420
Less accumulated depreciation and amortization (550,339)
-----------
Net property and equipment 431,081
-----------
Other assets:
Goodwill, net of accumulated amortization of $4,131 17,114
Note receivable, net of current portion above 242,000
Deposits and other assets 44,346
-----------
Total other assets 303,460
-----------
Total assets $ 5,239,377
===========
See accompanying notes
3
<PAGE>
ProtoSource Corporation
Condensed Balance Sheet
June 30, 1998
(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 102,854
Accrued expenses:
Payroll taxes, wages and other 32,174
Interest 1,274
Current portion of long-term debt 42,000
------------
Total current liabilities 178,302
------------
Long-term debt, net of current portion above:
Obligations under capital leases 132,330
Less current portion above (42,000)
------------
Total long-term debt 90,330
------------
Commitments and contingencies --
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized, --
none issued and outstanding
Common stock, no par value; 10,000,000 shares authorized,
1,802,333 shares issued and outstanding 10,957,767
Accumulated deficit (5,987,022)
------------
Total shareholders' equity 4,970,745
------------
Total liabilities and shareholders' equity $ 5,239,377
============
See accompanying notes
4
<PAGE>
ProtoSource Corporation
Condensed Statements of Operations
(Unaudited)
Three months ended June 30,
---------------------------
1998 1997
----------- ------------
Net revenues $ 204,415 $ 171,599
----------- -----------
Operating expenses:
Cost of revenues 66,319 74,351
Sales and marketing 34,602 11,435
General and Administrative 266,623 416,122
----------- -----------
Total operating expenses 367,544 501,908
----------- -----------
Operating loss (163,129) (330,309)
----------- -----------
Other income (expense):
Interest Income 27,402 20,441
Interest Expense (429,482) (52,548)
Other Income, net 27,739 54,974
----------- -----------
Total other income (expense) (374,341) 22,867
----------- -----------
Loss from operations before provision (537,470) (307,442)
for income taxes
Provision for income taxes -- --
----------- -----------
Net Loss $ (537,470) $ (307,442)
=========== ===========
Net Income (Loss) Per Share of Common Stock:
Basic $ (.43) $ (.60)
Diluted $ (.43) $ (.60)
Weighted Average Number of Common Shares
Outstanding:
Basic 1,240,087 516,102
Diluted 1,240,087 516,102
See accompanying notes
5
<PAGE>
ProtoSource Corporation
Condensed Statements of Operations
(Unaudited)
Six months ended June 30,
------------------------
1998 1997
--------- ---------
Net revenues $ 414,558 $ 360,130
--------- ---------
Operating expenses:
Cost of revenues 135,066 116,387
Sales and marketing 64,203 28,808
General and Administrative 548,304 742,690
--------- ---------
Total operating expenses 747,573 887,885
--------- ---------
Operating loss (333,015) (527,755)
--------- ---------
Other income (expense):
Interest Income 27,417 73,457
Interest Expense (687,998) (103,828)
Other Income, net 73,479 154,844
--------- ---------
Total other income (expense) (587,102) 124,473
--------- ---------
Loss from operations before provision (920,117) (403,282)
for income taxes
Provision for income taxes -- --
--------- ---------
Net Loss $(920,117) $(403,282)
========= =========
Net Income (Loss) Per Share of Common Stock:
Basic $ (.96) $ (.78)
Diluted $ (.96) $ (.78)
Weighted Average Number of Common Shares
Outstanding:
Basic 954,245 515,720
Diluted 954,245 515,720
See accompanying notes
6
<PAGE>
<TABLE>
<CAPTION>
ProtoSource Corporation
Condensed Statements of Cash Flows
(Unaudited)
Six months ended June 30,
-----------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (920,117) $ (403,282)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation and amortization 643,005 110,875
Gain on termination of capital lease (24,315) --
Loss on re-negotiation of note receivable 16,279 --
Changes in operating assets:
Accounts receivable (3,570) (56,076)
Deposits and other assets 1 (20,593)
Accounts payable 6,747 787
Accrued liabilities (41,814) (237,937)
----------- -----------
Net cash (used) by operating activities (323,784) (606,226)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (46,202) (22,620)
Other assets -- (37,011)
Increase in notes receivable (79,029) --
Receipt of principal on notes receivable 169,021 --
Payment for termination of capital lease (150,000) --
----------- -----------
Net cash provided (used) by investing activities (106,210) (59,631)
----------- -----------
Cash flows from financing activities:
Increase in notes payable -- 350,000
Issuance of common stock 6,537,750 970
Payments on notes payable and capital lease obligations (770,213) (53,237)
Debt issuance costs incurred -- (45,500)
Offering costs incurred (1,071,915) --
----------- -----------
Net cash provided by financing activities 4,695,622 252,233
----------- -----------
Net increase (decrease) in cash and cash equivalents 4,265,628 (413,624)
Cash and cash equivalents at beginning of period 98,148 482,357
----------- -----------
Cash and cash equivalents at end of period $ 4,363,776 $ 68,733
=========== ===========
See accompanying notes
7
</TABLE>
<PAGE>
ProtoSource Corporation
Condensed Statements of Cash Flows
(continued)
(Unaudited)
Six months
ended June 30,
-------------------
1998 1997
--------- --------
Supplemental Disclosure of Cash Flow
information cash paid during the
period for:
Interest $204,440 $ 53,828
Income taxes -- --
Supplemental Disclosure of Non cash
Investing and Financing Activities:
Acquisition of equipment under capital lease $ -- $ 69,959
Issuance of common stock in
connection with financing -- 350,000
See accompanying notes
8
<PAGE>
ProtoSource Corporation
Notes to Condensed Unaudited Financial Statements
Basis of Presentation
The accompanying financial information of the Company is prepared in accordance
with the rules prescribed for filing condensed interim financial statements and,
accordingly, does not include all disclosures that may be necessary for complete
financial statements prepared in accordance with generally accepted accounting
principles. The disclosures presented are sufficient, in management's opinion,
to make the interim information presented not misleading. All adjustments,
consisting of normal recurring adjustments, which are necessary so as to make
the interim information not misleading, have been made. Results of operations
for the six months ended June 30, 1998 are not necessarily indicative of results
of operations that may be expected for the year ending December 31, 1998. It is
recommended that this financial information be read with the complete financial
statements included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997 previously filed with the Securities and Exchange
Commission.
Per Share Information
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which specifies the method of
computation, presentation and disclosure for earnings per share. SFAS No. 128
requires the presentation of two earnings per share amounts, basic and diluted.
Basic earnings per share is calculated using the average number of common shares
outstanding. Diluted earnings per share is computed on the basis of the average
number of common shares outstanding plus the dilutive effect of outstanding
stock options using the "treasury stock" method.
The basic and diluted earnings per share are the same since the Company had a
net loss for 1998 and 1997 and the inclusion of stock options and other
incremental shares would be anti-dilutive. Options and warrants to purchase
1,618,584 and 277,334 shares of common stock at June 30, 1998 and 1997
respectively were not included in the computation of diluted earnings per share
because the Company had a net loss and their effect would be anti-dilutive.
9
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Three Months Ended June 30, 1998 vs. Three Months Ended June 30, 1997
Net Revenues. For the three months ended June 30, 1998 net revenue was
$204,415 versus $171,599 in the same period of the prior year. The increase in
net revenue of 19.12% is primarily attributed to increased marketing efforts
resulting in the growth of Internet subscribers and continued growth in web
development revenue. The Company believes that revenues will continue to
increase as: (1) additional marketing plans are implemented that focus on
increasing name brand recognition and differentiation of products and services;
(2) as the number of network points of presence (POPs) are increased through
internal network growth and the acquisition of other Internet Service Providers;
(3) other computer oriented companies are acquired.
Operating Expenses. For the three months ended June 30, 1998, total
operating expenses were $367,544 versus $501,908 in the same period of the prior
year. This decrease of $134,364 or 26.77% is primarily attributed to the
implementation of several cost reduction or cost containment steps including the
cancellation of its Shaw Avenue capital lease. The Company realized a one-time
gain of $24,315 associated with the cancellation of the capital lease. The
Company believes the cancellation of the capital lease will have a positive
effect on future monthly operating expenses. However, the Company believes that
overall operating expenses will increase as revenues increase.
Operating Loss. The Company's operating loss for the three months ended
June 30, 1998 was $163,129 versus $330,309 in 1997, representing a decrease of
$167,180 or 50.61%. The decrease in the operating loss was primarily attributed
to increased revenue growth and a decrease in operating expenses. Management
believes that operating results will continue to improve as revenues increase.
Interest Income (expense). Net interest expense totaled $402,080 for the
three months ended June 30, 1998 versus net interest expense of $32,107 in 1997.
The increase in net interest expense of $369,973 is primarily attributable to
the expensing of the remaining debt issuance costs of $370,333 in connection
with the 1997 Bridge Loan financing which was repaid in May 1998. The Company
believes that the cancellation of the capital lease and the successful sale of
1,137,000 Units of the Company's securities (one share of common stock plus one
warrant to purchase one share of common stock) future interest expense will be
substantially reduced.
Other Income. Net other income decreased to $27,739 from $54,974 for the
three months ended June 30, 1998 and March 31, 1997, respectively. This decrease
in 1998 is due to lower rental income generated by the Shaw Avenue building and
the absence of miscellaneous sales. The company believes that with the
cancellation of the Shaw Avenue capital lease rental income will be eliminated
from Other Income in future reporting periods.
10
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Results of Operations
Six Months Ended June 30, 1998 vs. Six Months Ended June 30, 1997
Net Revenues. For the six months ended June 30, 1998 net revenues were
$414,558 versus $360,130 in the same period of the prior year representing an
increase of 15.11%. The Company increased marketing efforts in the six month
period which resulted in the growth of Internet subscribers and web development
revenue. The Company believes that revenues will continue to increase as: (1)
additional marketing plans are implemented that focus on increasing name brand
recognition and differentiation of products and services; (2) as the number of
network points of presence (POPs) are increased through internal network growth
and the acquisition of other Internet Service Providers; (3) other computer
oriented companies are acquired.
Operating Expenses. For the six months ended June 30, 1998, total operating
expenses were $747,573 versus $887,885 in the same period of the prior year.
This decrease of $140,312 or 15.8% is primarily attributed to the implementation
of several cost reduction or cost containment steps. The company successfully
cancelled the Visalia, California office rental lease and the Shaw Avenue
capital lease resulting in lower operating expenses. The Company realized a
one-time gain of $24,315 associated with the cancellation of the Shaw Avenue
capital lease. The Company believes the cancellation of the capital lease will
have a positive effect on future monthly operating expenses. However, the
Company believes that operating expenses will increase as revenues increase.
Operating Loss. The Company's operating loss for the six months ended June
30, 1998 was $333,015 versus $527,755 in 1997, representing a decrease of
$194,740 or 36.9%. The decrease in the operating loss was primarily attributed
to increased revenue growth and a decrease in operating expenses. Management
believes that operating results will continue to improve as revenues increase.
Interest Income (expense). Net interest expense totaled $660,581 for the
six months ended June 30, 1998 versus net interest expense of $30,371 for the
same period in 1997. The increase in net interest expense of $630,210 is
primarily attributable to the expensing of the remaining debt issuance costs of
$562,333 in connection with the 1997 Bridge Loan financing which was repaid in
May 1998. The Company believes that the cancellation of the capital lease and
the successful May sale of 1,137,000 Units of the Company's securities (one
share of common stock plus one warrant to purchase one share of common stock)
future interest expense will be substantially reduced.
Other Income. Net other income decreased to $73,479 from $154,844 for the
six months ended June 30, 1998 and June 30, 1997, respectively. This decrease of
$81,365 was primarily due to lower rental income generated by the Shaw Avenue
building. The company believes that with the cancellation of the Shaw Avenue
capital lease rental income will be eliminated from Other Income in future
reporting periods.
11
<PAGE>
Liquidity and Capital Resources
For the six months ended June 30,1998, the Company used $323,784 of cash for
operating activities primarily as a result of a net loss for the period. The
Company has a working capital of $4,326,534 at June 30, 1998. The Company has
obtained long-term financing through the May 1998 sale of 1,137,000 Units of the
Company's securities (one share of common stock and one warrant) at $5.75. As of
June 30, 1998 the Company had $4,363,776 in cash and cash equivalents and
$268,632 of total liabilities.
Capital expenditures relating primarily to the purchase of computer equipment,
furniture and fixtures, and software amounted to $46,202 for the six months
ended June 30, 1998. The capital investment is mainly in computer equipment to
sustain future growth of the Company.
12
<PAGE>
Part II. Other Information
Item 5. Other Information
As disclosed in the Company's May 13, 1998 prospectus, Dickon Pownall-Gray was
scheduled to become a director of the Company at the closing of the May offering
of 1,137,000 Units of the Company's securities. Mr. Pownall-Gray has informed
the Company that he is unable to join the board due to a recent business
development that has and will continue to demand the majority of his time.
In July 1998, the Company announced the naming of William Conis to the Board of
Directors. With the addition of Mr. Conis, the total number of Directors now
totals 4 (one inside director and three outside directors).
Item 6. Exhibits and Reports on From 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ProtoSource Corporation,
August 14, 1998 /s/ Raymond J. Meyers
-------------------------------------
Raymond J. Meyers
Chief Executive Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,363,776
<SECURITIES> 0
<RECEIVABLES> 115,560
<ALLOWANCES> 7,500
<INVENTORY> 0
<CURRENT-ASSETS> 4,504,836
<PP&E> 981,420
<DEPRECIATION> 550,339
<TOTAL-ASSETS> 5,239,377
<CURRENT-LIABILITIES> 178,302
<BONDS> 90,330
0
0
<COMMON> 10,957,767
<OTHER-SE> (5,987,022)
<TOTAL-LIABILITY-AND-EQUITY> 5,239,377
<SALES> 0
<TOTAL-REVENUES> 414,558
<CGS> 0
<TOTAL-COSTS> 747,573
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 687,998
<INCOME-PRETAX> (920,117)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (920,117)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
