-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SIfGNdAsuWPJjv4KklIr2OnYTFTlwRtRMNDtV64JwFE1ellhZJvsVT+9XNuStVVw PVxBwjZUqVeFmyksOwbqrQ== 0001000096-09-000208.txt : 20090814 0001000096-09-000208.hdr.sgml : 20090814 20090814134811 ACCESSION NUMBER: 0001000096-09-000208 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090814 DATE AS OF CHANGE: 20090814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTOSOURCE CORP CENTRAL INDEX KEY: 0000932772 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 770190772 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25594 FILM NUMBER: 091014317 BUSINESS ADDRESS: STREET 1: 2300 TULARE STREET STREET 2: SUITE 210 CITY: FRESNO STATE: CA ZIP: 93721 BUSINESS PHONE: 3103149801 MAIL ADDRESS: STREET 1: 2800 28TH STREET SUITE 170 CITY: SANTA MONICA STATE: CA ZIP: 90405 10-Q 1 proto63009.txt FORM 10-Q (JUNE 30, 2009) ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended June 30, 2009 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-25594 PROTOSOURCE CORPORATION ----------------------- (Exact name of registrant as specified in its charter) California 77-0190772 ---------- ---------- (State or other Jurisdiction of (IRS Employer Incorporation or Organization) Identification Number) 2345 Main St., Suite C, Hellertown, PA 18055 -------------------------------------------- (Address of Principal Executive Offices, Zip code) 610-332-2893 ------------ (Issuers' Telephone Number) Indicate 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 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 [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See definitions of "large accelerated filer", "accelerated filer," and "smaller" reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer? [ ] Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company? [ X ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] There were 9,927,329 shares of the registrant's common stock, no par value, outstanding as of June 30, 2009. PROTOSOURCE CORPORATION QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 June 30, 2009 - -------------------------------------------------------------------------------- INDEX Part I - Financial Information (unaudited): Item 1. Condensed consolidated balance sheet as of June 30, 2009 (unaudited) and December 31, 2008 3 Condensed consolidated statement of operations for the six-month and three-month periods ended June 30, 2009 and 2008 (unaudited) 4 Condensed consolidated statement of stockholders' deficiency for the six-month period ended June 30, 2009 (unaudited) 5 Condensed consolidated statement of cash flows for the six-month periods ended June 30, 2009 and 2008 (unaudited) 6 & 7 Notes to condensed consolidated financial statements (unaudited) 8 to 14 Item 2. Management's discussion and analysis of financial condition and results of operations 15 to 19 Item 3. Quantitative and qualitative disclosures about market risk 20 Item 4T. Controls and procedures 20 Part II - Other Information Other Information 21 Signature and certifications 22 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 and new product or service introductions by the Company and its competitors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release updates or revisions to these statements. - - 2 -
PROTOSOURCE CORPORATION ======================== CONDENSED CONSOLIDATED BALANCE SHEET - ------------------------------------------------------------------------------------------------------------- June 30, 2009 December 31, (unaudited) 2008 ------------ ------------ ASSETS Current assets: Cash $ 89,737 $ 12,826 Accounts receivable, net of allowance of $80,000 322,428 380,040 Advances to employees 85 765 Prepaid expenses 3,164 -- Advances to officers, net of obligations to officers 157,036 95,167 ------------ ------------ Total current assets 572,450 488,798 ------------ ------------ Property and equipment, at cost, net of accumulated depreciation and amortization of $681,864 and $655,383, respectively 52,286 78,767 ------------ ------------ Other assets: Goodwill - Acquisition of P2i Newspaper 375,067 375,067 Deposits 19,266 14,074 ------------ ------------ Total other assets 394,333 389,141 ------------ ------------ Total assets $ 1,019,069 $ 956,706 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Notes payable $ 2,425,000 $ 2,425,000 Current portion of obligations under capital leases 24,719 49,524 Accounts payable 348,916 299,865 Accrued interest 2,140,875 1,918,354 Amounts due to related party - P2i, Inc. 99,932 135,275 Accrued expenses - other 671,592 534,073 Advance from officer 12,000 12,000 ------------ ------------ Total current liabilities 5,723,034 5,374,091 ------------ ------------ Obligations under capital leases, non-current portion 22,881 19,046 Stock subscriptions payable 661,844 661,844 ------------ ------------ Total non-current liabilities 684,725 680,890 ------------ ------------ Stockholders' deficiency: Preferred stock, Series B, no par value; 5,000,000 shares authorized, 193,836 shares issued and outstanding 416,179 416,179 Common stock, no par value; 500,000,000 shares authorized, 9,927,329 shares issued and outstanding 26,143,461 26,143,461 Additional paid-in capital 2,291,607 2,291,607 Accumulated other comprehensive income 104,833 110,707 Accumulated deficit (34,344,770) (34,060,229) ------------ ------------ Net stockholders' deficiency (5,388,690) (5,098,275) ------------ ------------ Total liabilities and stockholders' deficiency $ 1,019,069 $ 956,706 ============ ============ See accompanying notes. - - 3 - PROTOSOURCE CORPORATION ======================= CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ SIX-MONTH THREE-MONTH PERIOD ENDED PERIOD ENDED JUNE 30, JUNE 30, 2009 2008 2009 2008 ------------ ------------ ------------ ------------ Net revenues $ 1,559,762 $ 1,782,998 $ 741,603 $ 902,452 ------------ ------------ ------------ ------------ Operating costs and expenses: Cost of revenues 1,213,827 1,384,496 586,740 684,812 Selling, general and administrative 366,719 563,721 187,961 262,965 Depreciation and amortization 26,481 36,982 11,624 18,519 ------------ ------------ ------------ ------------ Total operating costs and expenses 1,607,027 1,985,199 786,325 966,296 ------------ ------------ ------------ ------------ Operating loss (47,265) (202,201) (44,722) (63,844) ------------ ------------ ------------ ------------ Other income (charges): Interest expense (234,724) (212,505) (118,669) (108,565) Other income (expense) (2,552) 132 6,267 154 ------------ ------------ ------------ ------------ Net other (charges) (237,276) (212,373) (111,104) (108,411) ------------ ------------ ------------ ------------ Net loss ($ 284,541) ($ 414,574) ($ 155,826) ($ 172,255) ============ ============ ============ ============ Net loss per basic and diluted share of common stock ($ 0.00) ($ 0.01) ($ 0.00) ($ 0.01) ============ ============ ============ ============ Weighted average number of basic and diluted common shares outstanding 32,874,548 32,874,548 32,874,548 32,874,548 ============ ============ ============ ============ See accompanying notes. - - 4 - PROTOSOURCE CORPORATION ======================= CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2009 (unaudited) - --------------------------------------------------------------------------------------------------------------- Preferred Stock Common Stock --------------- ------------ Shares Amount Shares Amount ------------ ------------ ------------ ------------ Balance, December 31, 2008 193,836 $ 416,179 9,927,329 $ 26,143,461 Net loss Other comprehensive income, net of tax: Foreign currency translation adjustments ------------ ----------- ------------ ------------- Total comprehensive (loss) Balance, June 30, 2009 193,836 $ 416,179 9,927,329 $ 26,143,461 ============ ============ ============ ============ PROTOSOURCE CORPORATION ======================= CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (Continued) FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2009 (unaudited) - ------------------------------------------------------------------------------------------------------------------------------------ Accumulated Additional Other Paid-in Comprehensive Accumulated Comprehensive Capital Income Deficit Total (Loss) ------------ ------------ ------------ ------------ ------------ Balance, December 31, 2008 $ 2,291,607 $ 110,707 ($34,060,229) ($ 5,098,275) Net loss (284,541) (284,541) ($ 284,541) Other comprehensive income, net of tax: Foreign currency translation adjustments (5,874) (5,874) (5,874) ------------ ------------ ------------ ------------ ------------ Total comprehensive (loss) ($ 290,415) ============ Balance, June 30, 2009 $ 2,291,607 $ 104,833 ($34,344,770) ($ 5,388,690) ============ ============ ============ ============ See accompanying notes. - - 5 - PROTOSOURCE CORPORATION ======================= CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) - ------------------------------------------------------------------------------------------------------------- SIX-MONTH PERIOD ENDED JUNE 30, 2009 2008 --------- -------- INCREASE (DECREASE) IN CASH Cash flows from operating activities: Net loss ($284,541) ($414,574) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 26,481 36,982 Provision for bad debts -- 5,000 Accrued interest 222,521 200,725 Changes in operating assets and liabilities: Accounts receivable 57,612 90,564 Prepaid expenses (3,164) -- Accounts payable 49,051 103,026 Due to related party - P2i, Inc. -- (51,100) Accrued expenses - other 137,519 51,552 --------- --------- Net cash provided by operating activities 205,479 22,175 --------- --------- Cash flows from investing activities: Acquisitions of property and equipment -- (5,181) (Decrease) in due to related parties (35,343) (1,625) (Increase) decrease in advances to employees 680 (1,785) (Increase) decrease in advances to officers, net (61,869) 19,164 (Increase) in deposits (5,192) (5,460) --------- --------- Net cash provided by (used in) investing activities (101,724) 5,113 --------- --------- Cash flows from financing activities: Payments on obligations under capital leases (20,970) (17,106) --------- --------- Net cash (used in) financing activities (20,970) (17,106) --------- --------- Net increase in cash before effect of exchange rate changes on cash 82,785 10,182 Effect of exchange rate changes on cash (5,874) (722) --------- --------- Net increase in cash 76,911 9,460 Cash at beginning of period 12,826 72,381 --------- --------- Cash at end of period $ 89,737 $ 81,841 ========= ========= CONTINUED ON NEXT PAGE See accompanying notes. - - 6 - PROTOSOURCE CORPORATION ======================= CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED (unaudited) - ------------------------------------------------------------------------------------------ SIX-MONTH PERIOD ENDED JUNE 30, 2009 2008 ------- ------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $12,995 $11,780 ------- ------- Income taxes $ -- $ -- ------- ------- See accompanying notes. - - 7 - PROTOSOURCE CORPORATION ======================= NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - -------------------------------------------------------------------------------- 1. Nature of Operations and Summary of Significant Accounting Policies ------------------------------------------------------------------- Nature of operations - ProtoSource Corporation, formerly SHR Corporation doing business as Software Solutions Company (the Company), was incorporated on July 1, 1988, under the laws of the state of California. Until May 1, 2002, the Company was an Internet service provider (ISP). The Company provided dial-up Internet access, web hosting services and web development services. On May 1, 2002, the Company entered into an agreement to sell substantially all of the assets pertaining to the ISP to Brand X Networks, Inc. On August 16, 2007, the Company exercised its security interests and entered into a foreclosure acquisition agreement with Brand X Networks, Inc., taking possession of its business assets as collateral due to its inability to pay its debt to the Company. These assets were transferred to ProtoSource Acquisition II, Inc., a Nevada corporation (incorporated August 15, 2007) and a wholly owned subsidiary of the Company, on September 1, 2007. Effective September 1, 2007, the Company provides bilingual technical support services, web-hosting, and Internet connectivity. Effective January 1, 2004, the Company acquired P2i Newspaper, LLC. P2i Newspaper is principally engaged in the conversion of text and graphics from print to interactive Web content. Its clients include newspaper groups located in the United States and the United Kingdom. P2i Newspaper is headquartered in Bethlehem, Pennsylvania and has a data conversion center located in Kuala Lumpur, Malaysia. Interim Financial Statements - The accompanying financial statements for the six-months and three-months ended June 30, 2009 are unaudited, and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles of the United States of America have been condensed or omitted pursuant to those rules and regulations. Accordingly, these interim financial statements should be read in conjunction with the audited financial statements and notes thereto contained in ProtoSource Corporation (the "Company") Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on April 15, 2009. The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for other interim periods or for the full fiscal year. In the opinion of management, the information contained herein reflects all adjustments necessary for a fair statement of the interim results of operations. All such adjustments are of a normal, recurring nature. Certain reclassifications have been made to the prior year amounts to conform to the current year presentation. The year-end condensed balance sheet data was derived from audited financial statements in accordance with the rules and regulations of the SEC, but does not include all disclosures required for financial statements prepared in accordance with generally accepted accounting principles of the United States of America. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All of the Company's subsidiaries are wholly owned for the periods presented. All intercompany transactions have been eliminated. - - 8 - PROTOSOURCE CORPORATION ======================= NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) - -------------------------------------------------------------------------------- 1. Nature of Operations and Summary of Significant Accounting Policies - Continued ----------------------------------------------------------------------- Basis of presentation - The accompanying unaudited condensed consolidated financial statements of the Company are prepared in conformity 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, 2009 are not necessarily indicative of the results expected for the full fiscal year or for any future period. It is recommended that this financial information be read with the complete financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2008 previously filed with the Securities and Exchange Commission. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flows to meet its obligations on a timely basis, to obtain additional financing as may be required, and to generate revenues to a level where the Company becomes profitable. These measures are essential, as the Company has experienced cash liquidity shortfalls from operations. The Company's continued existence is dependent upon its ability to achieve its operating plan. Management's plans include the following: o Obtaining additional working capital through the sale of common stock or debt securities. o The ability of ProtoSource to successfully implement its strategic plan as follows: ProtoSource's primary focus is the delivery of ePublishing Solutions and related services, to newspapers, retailers, and magazines, utilizing internally-developed, proprietary applications bridging the divide between traditional print revenue and the opportunities online via a coordinated sales and marketing strategy in the United States and Europe. Secondarily, but of strategic importance, the Company operates a technical support facility in Fresno, CA. These two distinct suites of services and solutions are offered by the Company's two principle operating units: P2i Newspapers and ProtoSource Acquisition II dba BX-Solutions.: P2i Newspaper delivers products and services tailored specifically to create online versions of print content, primarily for the print and publishing industries. The Company's proprietary system allows for the normalization of diverse forms of data, including text and graphics, which can be integrated by a seamless, dynamic, and highly customizable front-end interface. This allows customers to have their data re-purposed for new revenue generation. It also serves to enhance the customer's own productivity by enabling more effective information management and exchange between themselves and their end customers, who both gain greater satisfaction through the enhanced interactivity. - - 9 - PROTOSOURCE CORPORATION ======================= NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) - -------------------------------------------------------------------------------- 1. Nature of Operations and Summary of Significant Accounting Policies - Continued ----------------------------------------------------------------------- Every day of the week, 52 weeks a year, P2i receives electronic files from customers at its facility in Cyberjaya, just south of Kuala Lumpur, Malaysia. P2i employs approximately 100 staff in this 4,000 square foot office. This office was reduced in physical size from 6,000 to 4,000 sq ft in July 2009. Incoming data files are processed overnight for delivery the following morning. Data is delivered not only to P2i's web servers for seamless integration into our clients' existing, hosted web sites, but also distributed back to clients and their business partners in a wide range of formats. The combination of low labor costs, a well-educated labor pool fluent in English, and sophisticated technologies makes P2i effective and competitive. The online presentation and Web enablement of the Company's clients' content is the key to efficient, effective Web presence, and the ensuing revenues and profits such a presence will yield. The Company takes either the same electronic files that generate print output, or existing online content in the public domain and uses that content to deliver a vastly enhanced, user friendly, online presence, adding a myriad of user-friendly features that are unique to Web-based presentations. This cost-effective solution perfectly transfers the client's known brand identity to the Internet, and integrates into the delivery all the inherent E-commerce, interactive and database features needed to maximize its impact and benefits. Services of P2i Newspaper comprise the following: Hosted Solutions -- Publishers large and small may use the Company's array of customizable, turnkey, hosted products for entire publications, sections and vertical-specific solutions. Utilizing proprietary technology, the Company converts print content comprising editorial and media ads into interactive, online content that is seamlessly incorporated into existing newspaper/publisher web sites. At the end of every business day, publishing clients transmit to the Company the same electronic versions of ads and pages that go to press. These files are received by the Company's production group, processed, quality checked, and delivered to the hosting servers by the start of the following business day. Data Extraction -- Customers utilizing in-house or third party solutions may rely upon the Company's ability to database incoming content down to the minutest subset. The Company has solutions that will convert multiple forms of disparate electronic content and process them into one constant data flow as one of its specialties. Extracting relevant data points, merging consistencies and fielding content to produce a data feed, per the client's or third party's specifications, is at the core of the Company's technology. The ensuing data enables tight search functions and powers retail advertising web sites. Content Review - Because online content needs to reflect the values, relevance and accuracy that print institutions have embodied for centuries, the Company's Content Review team functions to examine thousands of items a day for retailers and newspapers, editing, proofing and determining relevancy. The staff reviews pricing, language, brand names, and scores of other specifics, delivering a critical component in the online publishing of user-generated content. - - 10 - PROTOSOURCE CORPORATION ======================= NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) - -------------------------------------------------------------------------------- 1. Nature of Operations and Summary of Significant Accounting Policies - Continued ----------------------------------------------------------------------- Technical Support -- The Company has also launched a poly-lingual Technical Support team. Unlike a traditional call center that scripts its responses, this functional group separates itself from the competition by providing a highly trained, technically skilled support person that is trained to understand the idiosyncrasies of customers' products and services to ensure each caller gets the best possible service. ProtoSource Acquisition II, Inc. dba BX Solutions delivers technical support, hosting and Internet access to telephone and Internet companies. The Company's second facility in Fresno, CA, operated by, and branded as, BX-Solutions, is wholly-owned subsidiary and employs approximately 30 staff providing 24/7 English and Spanish technical support via incoming telephone calls to the customers of technology companies. These comprise small and mid-size Internet service providers and telcos in the United States. This facility also houses and manages servers for its own customers. Services of ProtoSource Acquisition II, Inc. dba BX Solutions comprise the following: Technical Support - Customers of BX offer their subscribers either Internet access or other related communications services. These include local and regional Internet access for consumers and businesses using dial-up, broadband and wireless connectivity. BX provides Bilingual technical support services on an outsource basis to these subscribers, 24/7/52. Dial-up Internet Services - BX has a very small local consumer network to which it provides Internet Services including connectivity, email and web hosting. Additionally BX provisions the same services under different brand names for other companies: these would be designated virtual Internet Service Providers as BX provides the entire infrastructure. Hosting - BX provides some hosting for its own customers. P2i's hosting has been relocated to different facility. The combination of on-target sales strategies, low labor costs, a well-educated labor pool fluent in English, and sophisticated technologies are key to the Company's competitive strategy. If management cannot sufficiently execute and achieve the above stated objectives, the Company may find it necessary to dispose of assets, or undertake other actions as may be appropriate. Net (loss) per basic and diluted share of common stock - Basic loss per share is calculated using the weighted average number of common shares outstanding. Diluted loss per share is computed on the basis of the weighted average number of common shares outstanding during the period increased by the dilutive effect of outstanding stock options using the "treasury stock" method. The weighted average number of basic and diluted common shares outstanding includes: Actual shares issued and outstanding at June 30, 2009 9,927,329 Stock subscriptions payable - note holders 2,750,000 Stock subscriptions payable - investment banker 813,688 Series B convertible preferred stock issued to P2i, Inc. 19,383,531 ---------- 32,874,548 ========== - - 11 - PROTOSOURCE CORPORATION ======================= NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) - -------------------------------------------------------------------------------- 1. Nature of Operations and Summary of Significant Accounting Policies - Continued ----------------------------------------------------------------------- The basic and diluted loss per share are the same since the Company had a net loss for 2009 and 2008 and the inclusion of stock options and other incremental shares would be anti-dilutive. Options and warrants to purchase 1,070,000 shares of common stock at June 30, 2009 and 2008 were not included in the computation of diluted loss per share. Reclassifications - Certain reclassifications have been made to the 2008 financial statement presentation for comparability with the 2009 financial statements. 2. Recently Issued Accounting Standards ------------------------------------ In May 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") issued SFAS No. 165, "Subsequent Events". This Statement sets forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This Statement is effective for interim and annual periods ending after June 15, 2009. The company adopted this Statement in the quarter ended June 30, 2009. This Statement did not impact the Company's financial position, results of operations or cash flows. In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles". This Statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). This Statement shall be effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles". This Statement did not impact the Company's financial position, results of operations or cash flows. In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133". This Statement requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, results of operations and cash flows. SFAS No. 161 is effective for the Company beginning January 1, 2009. This Statement did not impact the Company's financial position, results of operations or cash flows. In December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R will significantly change the accounting for business combinations in a number of areas including the treatment of contingent consideration, contingencies, acquisition cost, research and development assets and restructuring costs. In addition, under SFAS 141R, changes in deferred tax asset valuation allowances and acquired income tax uncertainties in a business combination after the measurement period will impact income taxes. SFAS 141R is effective for fiscal years beginning after December 15, 2008. This Statement did not impact the Company's financial position, results of operations or cash flows. - - 12 - PROTOSOURCE CORPORATION ======================= NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) - -------------------------------------------------------------------------------- 2. Recently Issued Accounting Standards - Continued ------------------------------------------------- In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, An Amendment of ARB No. 51." SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interests in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51's consolidation procedures for consistency with the requirements of SFAS 141R. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. This Statement did not impact the Company's financial position, results of operations or cash flows. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors' requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and was required to be adopted by the Company in the first quarter of 2008. This Statement did not impact the Company's financial position, results of operations or cash flows. 3. Series B Convertible Preferred Stock ------------------------------------ Common stock, holders of 193,836 shares of Series B Convertible Preferred Stock ("Series B Stock") are entitled to convert each share of Series B Stock into 100 shares of common stock. Series B stockholders are not entitled to receive dividends. In a liquidation, Series B Stock holders would be treated as if they were owners of the number of shares of common stock into which the Series B Stock is convertible. 4. Business Segment Data --------------------- The Company has two reportable business segments. The following is a description of each operating segment: Media & Data Conversion Technologies - These operations are principally engaged in the mining and database management of print, graphic and data content for the publishing industry, and its distribution via the Internet. Data is deliverable to the Company's web servers for seamless integration into the clients' hosted web sites, but also is distributed back to the client, and their business partners, in a wide range of formats to fit continually evolving, highly-diversified applications. Technical Support & Hosting Services - These operations are principally engaged in providing bilingual technical support services, web-hosting, and Internet connectivity. - - 13 - PROTOSOURCE CORPORATION ======================= NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (unaudited) - -------------------------------------------------------------------------------- 4. Business Segment Data - Continued --------------------------------- Financial information for the two reporting segments for the six and three months ended June 30, 2009 and 2008 is shown below: SIX-MONTH THREE -MONTH PERIOD ENDED PERIOD ENDED JUNE 30, JUNE 30, 2009 2008 2009 2008 ----------- ----------- ----------- ----------- Net revenues Media & Data Conversion Technologies $ 949,506 $ 1,092,781 $ 468,090 $ 558,150 Technical Support & Hosting Services 610,256 690,217 273,513 344,302 ----------- ----------- ----------- ----------- $ 1,559,762 $ 1,782,998 $ 741,603 $ 902,452 =========== =========== =========== =========== Cost of revenue Media & Data Conversion Technologies $ 645,942 $ 805,098 $ 319,750 $ 390,399 Technical Support & HostingServices 567,885 579,398 266,990 294,413 ----------- ----------- ----------- ----------- $ 1,213,827 $ 1,384,496 $ 586,740 $ 684,812 =========== =========== =========== =========== Gross margin Media & Data Conversion Technologies $ 303,564 $ 287,683 $ 148,340 $ 167,751 Technical Support & Hosting Services 42,371 110,819 6,523 49,889 ----------- ----------- ----------- ----------- $ 345,935 $ 398,502 $ 154,863 $ 217,640 =========== =========== =========== =========== Total operating costs and expenses Media & Data Conversion Technologies $ 940,770 $ 1,299,825 $ 467,064 $ 609,207 Technical Support & Hosting Services 666,257 685,374 319,261 357,089 ----------- ----------- ----------- ----------- $ 1,607,027 $ 1,985,199 $ 786,325 $ 966,296 =========== =========== =========== =========== Operating income (loss) Media & Data Conversion Technologies $ 8,737 ($ 207,045) $ 1,016 ($ 51,058) Technical Support & Hosting Services (56,002) 4,844 (45,738) (12,786) ----------- ----------- ----------- ----------- ($ 47,265) ($ 202,201) ($ 44,722) ($ 63,844) =========== =========== =========== =========== Interest and other income/(charges), net Media & Data Conversion Technologies ($ 139,077) ($ 134,748) ($ 67,892) ($ 69,595) Technical Support & Hosting Services (98,199) (77,625) (43,212) (38,816) ----------- ----------- ----------- ----------- ($ 237,276) ($ 212,373) ($ 111,104) ($ 108,411) =========== =========== =========== =========== Net income (loss) Media & Data Conversion Technologies ($ 130,340) ($ 341,793) ($ 66,876) (120,653) Technical Support & Hosting Services (154,201) (72,781) (88,950) (51,602) ----------- ----------- ----------- ----------- ($ 284,541) ($ 414,574) ($ 155,826) ($ 172,255) =========== =========== =========== JUNE 30, DECEMBER 31, 2009 2008 ----------- ------------ Identifiable assets Media & Data Conversion Technologies $ 964,410 $ 787,701 Technical Support & Hosting Services 54,658 169,005 ----------- ----------- $ 1,019,069 $ 956,706 =========== =========== 5. Subsequent Event ---------------- Management has evaluated subsequent events to determine if events or transactions occurring through April 14, 2009, require potential adjustment to or disclosure in the financial statements. As a result of this review, no subsequent events were deemed to impact the Company's financial position, results of operations and cash flows. - - 14 - PROTOSOURCE CORPORATION ======================= MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS (unaudited) - -------------------------------------------------------------------------------- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS. Certain statements in this section and elsewhere in this quarterly report on Form 10-Q are forward-looking in nature and relate to the Company's plans, objectives, estimates and goals. Words such as "expects," "anticipates," "intends," "plans," "projects," "forecasts," "believes," and "estimates," and variations of such words and similar expressions, identify such forward-looking statements. Such statements are made pursuant to the safe harbor provisions of the private securities litigation reform act of 1995 and speak only as of the date of this report. The statements are based on current expectations, are inherently uncertain, are subject to risks and uncertainties and should be viewed with caution. Actual results and experience may differ materially from those expressed or implied by the forward-looking statements as a result of many factors, including, without limitation, those set forth under "Description of Business" in the Company's most recent Annual Report on Form 10-K. The Company makes no commitment to update any forward-looking statement or to disclose any facts, events, or circumstances after the date hereof that may affect the accuracy of any forward-looking statement. Results of Operations - Six Months Ended June 30, 2009 vs. Six Months Ended June 30, 2008 - -------------------------------------------------------------------------------- Net Revenues - For the six months ended June 30, 2009 and 2008, net revenues were $1,559,762 and $1,782,998, respectively. In the current year, $949,506 of these revenues are attributed to the operations of P2i Newspaper and $610,256 are attributed to the operations of ProtoSource Acquisition II (d.b.a. BX-Solutions). This represents a combined decrease of $223,236 in revenues compared to the previous year. P2i Newspaper's net revenues are attributable to Media and Data Conversion Technologies and BX-Solutions' (ProtoSource Acquisition II) net revenues are attributable to Technical Support and Hosting Services operations. BX-Solutions contributed $610,256 of revenues for the first six months of 2009 versus $690,217 for 2008. P2i Newspaper recorded $1,092,781 during the same period in 2008; its current year revenues of $949,506 represent a decrease over last year of $143,275. This is attributable to multiple factors: the continuing decline in print advertising resulting in fewer ads to be processed for online publishing; the deteriorating newspaper industry and in particular the bankruptcies of Tribune Group and Minneapolis Star Tribune, both of which are customers of P2i Newspaper. Additionally the state of the economy is driving down both unit pricing and volume. Operating Costs and Expenses - For the six months ended June 30, 2009, combined total operating costs and expenses totaled approximately $1,607,000 versus $1,985,200 in 2008, a $378,170 reduction from the previous year. Approximately, $19,100 of reduced costs were directly attributable to the operations of ProtoSource Acquisition II, Inc. Additionally, there was a $359,055 reduction of total operating costs and expenses over the prior year for P2i Newspaper. Total operating costs and expenses in the amount of $940,770 were related to the operations of P2i Newspaper: For P2i Newspaper, this is a reduction of approximately $360,000 over the preceding year and breaks down as follows: Approximately $159,000 less in production expenditures, approximately $45,000 less in selling expenses, and approximately $156,000 less in general and administrative costs. The decrease in selling and general & administrative costs is the result of a restructuring of the US management team in the latter part of 2008. This included the elimination of the Group Financial Manager's position, those responsibilities being assumed in part by the CEO and in part by a consultant. This has yielded savings in excess of $100,000 and resulted in greater efficiencies. Additionally, the US-based position of Chief Technology Officer was eliminated and those duties are now shared between the SVP of Product Development and the Lead Developer at P2i Newspaper in Malaysia. Total operating costs and expenses in the amount of $666,250 are related to the operations of ProtoSource Acquisition II, Inc. (d.b.a. BX-Solutions): These costs break down as follows: Approximately $568,000 in production expenditures and approximately $98,000 in sales, general and administrative costs. - - 15 - PROTOSOURCE CORPORATION ======================= MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- For the six months ended June 30, 2009, combined cost of revenues -- as a percentage of combined revenues -- were 77.8% versus 77.6% for the same period in 2008. P2i Newspaper's cost of revenues as a percentage of revenues were 68.0% and 73.7% in 2009 and 2008, respectively. BX-Solutions cost of revenues as a percentage of revenues for the six months ended June 30 were 93.1% for 2009 and 83.9% for 2008. This increase in cost of revenues is largely attributable to a shift in the mix of products and services sold: revenues from dial-up Internet services declined and was replaced by the more labor-intensive Technical Support revenues. BX-Solutions will not see a decline in the cost of revenues as a percentage of revenues until revenues increase and the Company can enjoy economies of scale within BX-Solutions. For the six months ended June 30, 2009, combined selling, general and administrative expenses posted a decrease of approximately $197,000 over the previous year due to the following significant components: In respect to BX-Solutions, a $4,000 increase is attributable to general and administrative costs (for the facility in Fresno, CA). In respect to P2i Newspaper, approximately $45,000 less in selling expenses is entirely attributable to decrease in expense. And for P2i Newspaper, approximately $156,000 less in general and administrative expenses, largely attributable to reductions in the Company's liability insurance, salaries and local taxes was realized this year over last for the six months ended June 30, 2009. Administrative costs principally consist of the Company's management office and personnel, professional fees associated with maintenance of the Company, and officers' and directors' liability insurance costs. Interest Expense - Interest expense totaled $234,724 for the six-month period ended June 30, 2009 versus $212,505 in the same period in 2008. The interest expense is predominantly due to the convertible notes obtained during 2002, 2003, and 2004 to fund the operations of the Company and P2i Newspaper -- pending and post merger -- with approximately $10,500 and $6,000 attributable to equipment lease financing in 2009 and 2008, respectively. Results of Operations - Three Months Ended June 30, 2009 vs. Three Months Ended June 30, 2008 - -------------------------------------------------------------------------------- Net Revenues - For the three months ended June 30, 2009 and 2008, net revenues were $741,603 and $902,452, respectively. In the current year, $468,090 of these revenues is attributed to the operations of P2i Newspaper and $273,513 are attributed to the operations of ProtoSource Acquisition II (d.b.a. "BX-Solutions"). This represents a combined decrease of $160,849 in revenues over the previous year. P2i Newspaper's net revenues are attributable to Media and Data Conversion Technologies and BX-Solutions' (ProtoSource Acquisition II) net revenues are attributable to Technical Support and Hosting Services operations. Operating Costs and Expenses - For the three months ended June 30, 2009, combined total operating costs and expenses totaled $786,325 versus $966,296 in 2008, a $179,971 reduction over the previous year. $37,828 of reduced costs were directly attributable to the operations of ProtoSource Acquisition II, Inc. and $142,143 attributable to the operations of P2i Newspaper. - - 16 - PROTOSOURCE CORPORATION ======================= MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- Results of Operations - Three Months Ended June 30, 2009 vs. Three Months Ended June 30, 2008 - Continued - -------------------------------------------------------------------------------- For the three months ended June 30, 2009, $467,074 of total operating costs and expenses are related to the operations of P2i Newspaper: For P2i Newspaper, this is a reduction of approximately $142,140 over the same quarter in the preceding year and breaks down as follows: Approximately $70,650 less production expenditures, approximately $2,400 more in selling expenses, approximately $72,790 less in general and administrative costs, and approximately $1,000 less in depreciation expense. The decrease in selling and general & administrative costs is the result of a restructuring of the US management team in the latter part of 2008. This included the elimination of the Group Financial Manager's position, those responsibilities being assumed in part by the CEO and in part by a consultant. This has yielded savings in excess of $20,000 and resulted in greater efficiencies. Additionally the US-based position of Chief Technology Officer was eliminated and those duties are now shared between the SVP of Product Development and the Lead Developer at P2i in Malaysia. For the three months ended June 30, 2009, approximately $319,200 of total operating costs and expenses are related to the operations of ProtoSource Acquisition II, Inc. These costs break down as follows: Approximately $266,900 in production expenditures and approximately $52,300 in selling, general and administrative costs For the three months ended June 30, 2009, combined cost of revenues -- as a percentage of combined revenues -- were 79.1% versus 75.9% for the same period in 2008. For the three months ended June 30, 2008, P2i Newspaper's cost of revenues as a percentage of revenues were 68.3% and 69.1% in 2009 and 2008, respectively. BX-Solutions cost of revenues for the three months ended June 30, 2009 were 97.6% vs. 85.5% in 2008. For the three months ended June 30, 2009, combined selling, general and administrative expenses posted a net decrease of approximately $75,000 over the same quarter in the previous year due to the following significant components: In respect to BX-Solutions, approximately $2,970 is attributable to general and administrative costs (for the facility in Fresno, CA) and a $3,000 provision for uncollectible accounts recorded in 2008. In respect to P2i Newspaper, approximately $2,370 more in selling expenses. For P2i Newspaper, approximately $72,790 less in general and administrative expenses, largely attributable to a restructuring of the US management team in the latter part of 2008, was realized this year over last for the three months ended June 30, 2008. Administrative costs principally consist of the Company's management office and personnel, professional fees associated with maintenance of the Company, and officers' and directors' liability insurance costs. Interest Expense - Interest expense totaled $118,670 for the three-month period ended June 30, 2009 versus $108,565 in the same period in 2008. The interest expense is predominantly due to the convertible notes obtained during 2002, 2003, and 2004 to fund the operations of the Company and P2i Newspaper -- pending and post merger -- with approximately $4,090 attributable to equipment lease financing recorded in each of the three-month periods. Liquidity and Capital Resources - ------------------------------- We assess liquidity by our ability to generate cash to fund our operations. Significant factors that affect the management of our liquidity include: current balances of cash, expected cash flows provided by operations, current levels of our accounts receivable and accounts payable balances, access to financing sources and our expected investment in equipment. For the six-month period ended June 30, 2009, the Company provided approximately $77,000 more cash than used. - - 17 - PROTOSOURCE CORPORATION ======================= MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS - CONTINUED (unaudited) - ------------------------------------------------------------------------------- Even though the Company's net loss for the six-month period ended June 30, 2009 was approximately $284,500, cash flows provided by operations approximated $205,000. In part, this was due to non-cash depreciation charges of approximately $26,500. Additional significant components enhancing working capital and available cash - because they were accrued but unpaid during the period -- were as follows: Approximately $222,000 of accrued interest arising from the Company's convertible debt obligations, approximately $87,000 of accrued supplier and service provider obligations together with office and facilities maintenance expenses, approximately $100,000 of accrued payroll expenses, plus approximately $58,000 in decreased outstanding accounts receivable levels over that at the beginning of the year. During the six-month period ended June 30, 2009, the Company had net negative cash flows from investing activities of approximately $101,700. This was primarily due to an approximately $62,000 increase in advances to officers, $35,300 decrease in amount due to related party, and a $5,200 increase in deposits. And during the six-month period ended June 30, 2009, the Company used approximately $21,000 in financing activities for payments on its capital lease obligations. As of June 30, 2009, the Company had a $89,737 balance in cash and $482,713 in accounts receivable and other current assets. Taken together with $5,723,034 of total current liabilities, this resulted in a negative working capital position of $5,150,584 at June 30, 2009. $4,565,875 of this amount pertains to the Company's obligations to its convertible debt holders. In July 2007, the Company entered into an investment banking agreement with Colebrooke Capital, Inc. The fees under this arrangement were $7,500 down and $3,500 for the first 90 days of the agreement. Under this arrangement the Company will be required to a pay a 7% financing fee on any funds raised by Colebrooke Capital. Furthermore, in respect to capital transactions introduced by Colebrooke Capital, there will be a 5% transaction fee requirement, but no fees on any Company generated deals. On December 10, 2008, the board ratified a Company proposal to compensate Colebrook Capital in full with 250,000 common shares. This is in respect of an investment banking relationship entered into by the Company in 2007. The goal was to raise funds to make an acquisition but the deterioration of the equities markets has made this untenable and the relationship has been terminated. The Company anticipates issuing these shares in Q3 of 2009. On August 15, 2007, the Company entered into a 24-month term capital lease agreement with Bankers Capital for the purchase of computer and computer related items valued at $20,123 with monthly lease payments of $1,163. The lease term expires July 14, 2009 and the residual maturity date was July 15, 2009 with a $1 purchase option. $2,720 was paid to Bankers Capital at the start of the lease to cover the first payment, one payment held for a security deposit, and for UCC filing and documentation fees. Company officers, Peter A. Wardle and Thomas C. Butera, are personal guarantors of this agreement. On October 15, 2007, the Company entered into a 24-month term capital lease agreement with Bankers Capital for the purchase of computer and computer related items valued at $24,380 with monthly lease payments of $1,408. The lease term expires September 14, 2009 and the residual maturity date is September 15, 2009 with a $1 purchase option. $3,212 was paid to Bankers Capital at the start of the lease to cover the first payment, one payment held for a security deposit, and for UCC filing and documentation fees. Company officers, Peter A. Wardle and Thomas C. Butera, are personal guarantors of this agreement. At June 30, 2009, 9,927,329 of common shares were issued and outstanding and the Company had obligations to issue an additional 22,947,219 shares of common with a further 33,945,000 shares committed for issuance. - - 18 - PROTOSOURCE CORPORATION ======================= MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- Liquidity and Capital Resources - Continued - ------------------------------------------- On May 15, 2008, the Company entered into two 24-month term capital lease agreements with Bankers Capital for the purchase of computer and computer related items valued at $25,579 and $37,571, respectively, with monthly lease payments of $1,478 and $2,048, respectively. The lease terms expire April 7, 2010 and the residual maturity date is April 15, 2010 with a $1 purchase option for each agreement. Amounts of $3,450 and $4,590 were paid to Bankers Capital at the start of the respective leases to cover the first payment, one payment held for a security deposit, and for UCC filing and documentation fees. Company officers, Peter A. Wardle and Thomas C. Butera, are personal guarantors of both of these agreements. Critical Accounting Policies and Estimates - ------------------------------------------ Management's discussion and analysis of its financial position and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following: In accordance with SFAS No. 109, "Accounting for Income Taxes", the Company maintains a valuation allowance of $5,600,000 as of December 31, 2008 on deferred tax assets relating to its net operating losses which the Company has not determined to be more likely than not realizable. In accordance with SFAS No. 165, "Subsequent Events", management has evaluated subsequent events to determine if events or transactions occurring through August 14, 2009, require potential adjustment to or disclosure in the financial statements. No adjustments or disclosures were deemed to be necessary. The Company considers certain trade accounts receivable to be of doubtful collection; accordingly, the Company has an $80,000 allowance for doubtful accounts. In consideration of SEC Proposed Rule Release 33-8098, the Company does not maintain estimates for sales returns or credits, cancellations and warranties. Due to the peculiar nature of the type of services provided and the underlying processes employed by the Company to create and deliver completed product (without defect) to its customers, there is no material exposure to what would be classified as sales returns or credits. Likewise, cancellations and or warranties are not significantly measurable in respect to the type of electronic product (Internet Website content) deliverable to the Company's customers; and historically, there has been no basis or need for such. - - 19 - PROTOSOURCE CORPORATION ======================= MANAGEMENT'S DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS - CONTINUED (unaudited) - -------------------------------------------------------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. N/A Item 4T. CONTROLS AND PROCEDURES. Evaluation of disclosure controls and procedures. As of June 30, 2009, an evaluation was performed under the supervision and with the participation of our management, including the chief executive officer, or CEO, who is also the acting chief financial officer, or CFO, of the effectiveness of the design and operation of our disclosure procedures. Based on management's evaluation as of the end of the period covered by this Report, our principal executive officer and chief financial officer has concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") were effective to ensure that the information required to be disclosed by us in the reports that we file under the Exchange Act is gathered, analyzed and disclosed with adequate timeliness, accuracy and completeness. Changes in internal controls. There have been no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referred to above, nor were there any significant deficiencies or material weaknesses in our internal controls. Accordingly, no corrective actions were required or undertaken except as disclosed. - - 20 - PROTOSOURCE CORPORATION ======================= OTHER INFORMATION (unaudited) - -------------------------------------------------------------------------------- PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS. From time to time the Company is subject to litigation incidental to its business. The Company is not currently a party to any material legal proceedings Item 1A. RISK FACTORS. None. Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. Item 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. Item 5. OTHER INFORMATION. None. Item 6. EXHIBITS. Exhibits. The following exhibits are filed with this report: Exhibit 31.1 - Certification of CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 - Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350 - - 21 - PROTOSOURCE CORPORATION ======================= SIGNATURE - -------------------------------------------------------------------------------- In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PROTOSOURCE CORPORATION /s/ Peter Wardle ------------------------- Peter Wardle, Chief Executive Officer/ Chief Financial Officer Date: August 14, 2009
- - 22 - EX-31.1 2 proto63009exh311.txt RULE 13A-14(A)/15D-14(A) CERTIFICATIONS Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Peter Wardle, Chief Executive Officer and Chief Financial Officer of ProtoSource Corporation, certify that: 1. I have reviewed this quarterly report on Form 10-Q of ProtoSource Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is likely to materially affect, the small business issuer's internal control over financial reporting; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting: and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the small business issuer's ability to record, process, summarize and report financial data and have identified for the small business issuer's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: August 14, 2009 /s/ PETER WARDLE --------------------------------------- Peter Wardle, Chief Executive EX-32.1 3 proto63009exh321.txt SECTION 1350 CERTIFICATIONS Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of ProtoSource Corporation (the "Company") on Form 10-Q for the quarterly period ended June 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Peter Wardle, Chief Executive Officer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/Peter Wardle - --------------- Peter Wardle Chief Executive Officer and Chief Financial Officer Dated: August 14, 2009 -----END PRIVACY-ENHANCED MESSAGE-----