UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 March 31, 2008
Commission File Number: 000-30781
MANGOSOFT, INC.
(Exact name of small business issuer as specified in its charter)
| 87-0543565 |
| (State or other jurisdiction | (IRS Employer Identification No.) |
| of incorporation or organization) | |
| | |
29 Riverside St., Ste A Box 8 | |
| 03062 |
| (Address of principal executive offices) | (Zip code) |
Issuer’s telephone number: (603) 324-0400
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 preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o |
| Non-accelerated filer (Do not check if a smaller reporting company) o | 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 o No x
As of May 15, 2008, 5,443,157 shares of the Registrant’s common stock, par value $0.001 per share, were outstanding.
MANGOSOFT, INC. AND SUBSIDIARIES
INDEX
| | Page |
PART I. FINANCIAL INFORMATION | |
| | |
ITEM 1 – Condensed Consolidated Financial Statements (Unaudited): | |
| | |
| Balance Sheets as of March 31, 2008 and December 31, 2007 | 3 |
| Statements of Operations for the Three Months Ended March 31, 2008 and 2007 | 4 |
| Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007 | 5 |
| Notes to Unaudited Condensed Consolidated Financial Statements | 6 |
| | |
| ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 |
| | |
| ITEM 3 – Quantitative and Qualitative Disclosures About Market Risk | 13 |
| | |
| ITEM 4 – Controls and Procedures | 13 |
| | |
PART II. OTHER INFORMATION | |
| | |
| ITEM 1 – Legal Proceedings | 14 |
| ITEM 1a. – Risk Factors | 15 |
| ITEM 6 – Exhibits and Reports on Form 8-K | 18 |
| | |
| Signature | 20 |
Officer Certification | 21 |
MANGOSOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| | March 31, | | December 31, | |
| | 2008 | | 2007 | |
| | (Unaudited) | | | |
ASSETS | | | | |
| Current Assets: | | | | | | |
| Cash and cash equivalents | $ | 1,102,481 | | $ | 318,065 | |
| Accounts receivable | | 5,750 | | | 20,607 | |
| Total assets | $ | 1,108,231 | | $ | 338,672 | |
| | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current Liabilities: | | | | | | |
| Accounts payable | $ | 158,465 | | $ | 114,566 | |
| Accrued compensation | | 7,788 | | | 7,788 | |
| Other accrued expenses and current liabilities | | 21,088 | | | 41,609 | |
| Total current liabilities | | 187,341 | | | 163,963 | |
| | | | | | | |
| Stockholders’ Equity: | | | | | | |
| Preferred stock - $.001 par value; authorized, 5,000,000 shares; issued and outstanding, 20,000 | | 20 | | | 20 | |
| Common stock - $.001 par value, authorized 15,000,000 shares in March 2008 and December 2007; issued and outstanding, 5,443,157 in March 2008 and 3,413,038 in December 2007 | | 5,443 | | | 3,413 | |
| Additional paid-in capital | | 90,926,273 | | | 89,904,757 | |
| Accumulated deficit | | (90,010,846 | ) | | (89,733,481 | ) |
| Total stockholders' equity | | 920,890 | | | 174,709 | |
| Total liabilities and stockholders' equity | $ | 1,108,231 | | $ | 338,672 | |
See notes to the unaudited condensed consolidated financial statements.
MANGOSOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Three Months Ended March 31, | |
| | | 2008 | | 2007 | |
| | | (Unaudited) | |
| | | | | | |
| Service revenues | | $ | 65,607 | | $ | 61,931 | |
| Costs and expenses: | | | | | | | |
| Cost of services | | | 65,601 | | | 64,742 | |
| General and administrative | | | 281,642 | | | 119,298 | |
| Loss from operations | | | (281,636 | ) | | (122,109 | ) |
| | | | | | | | |
| Interest income | | | 4,271 | | | 9,135 | |
| Net loss | | $ | (277,365 | ) | $ | (112,974 | ) |
| | | | | | | | |
| Net loss per share – basic and diluted | | $ | (0.07 | ) | $ | (0.04 | ) |
| | | | | | | | |
Weighted average shares outstanding – basic and diluted | | | 4,149,235 | | | 3,146,371 | |
See notes to the unaudited condensed consolidated financial statements.
MANGOSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Three Months Ended March 31, | |
| | | 2008 | | 2007 | |
| | | (Unaudited) | |
| | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | |
| | | | | | | | |
| Net loss | | $ | (277,365 | ) | $ | (112,974 | ) |
| Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | |
| Increase (decrease) in cash from the change in: | | | | | | | |
| Accounts receivable | | | 14,857 | | | 12,903 | |
| Accounts payable | | | 43,899 | | | (29,875 | ) |
| Accrued compensation | | | - | | | (3,894 | ) |
| Other accrued expenses | | | (20,521 | ) | | (10,309 | ) |
| Net cash used in operating activities | | | (239,130 | ) | | (144,149 | ) |
| | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | |
| Net Proceeds from Private Placement of Common Stock | | | 1,023,546 | | | 925,000 | |
| Net cash provided by financing activities | | | 1,023,546 | | | 925,000 | |
| | | | | | | | |
| NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 784,416 | | | 780,851 | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 318,065 | | | 125,348 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 1,102,481 | | $ | 906,199 | |
See notes to the unaudited condensed consolidated financial statements.
MANGOSOFT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | NATURE OF BUSINESS AND BASIS OF PRESENTATION |
MangoSoft, Inc. and subsidiaries (the "Company") markets, sells and supports Internet business software and services that improve the utility and effectiveness of Internet-based business applications. The Company’s software solutions address the networking needs of small businesses, workgroups and large enterprises. The Company is engaged in a single operating segment of the computer software industry.
The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, all significant adjustments, which are normal, recurring in nature and necessary for a fair presentation of the financial position, cash flows and results of the operations of the Company, have been consistently recorded. The operating results for the interim periods presented are not necessarily indicative of expected performance for the entire year. Certain amounts from the prior year have been reclassified to conform to the current year presentation.
The unaudited information should be read in conjunction with the audited financial statements of the Company and the notes thereto for the year ended December 31, 2007 included in the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission.
As shown in the unaudited condensed consolidated financial statements, during the three months ended March 31, 2008 and 2007, the Company incurred net losses of $277,365 and $112,974 respectively. Cash used in operations during the three months ended March 31, 2008 and 2007 was $239,130 and $144,149, respectively. These factors, among others, raise significant doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts 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 flow and meet its obligations on a timely basis and ultimately attain profitability.
On September 11, 2006, Mangosoft Corp. assigned the ownership and legal titles of twelve of its patents and applications with no recorded value to Mangosoft Intellectual Property, Inc., (a wholly owned subsidiary), Pursuant to the agreement, Mangosoft Corp. assigned the entire right, title, and interest in and to the following applications to Mangosoft Intellectual Property, Inc.:
Title | | Application No./Patent No. | | Filing Date/Issue Date |
| System For Tracking Data | | 08/848,970 | | 05/02/97 |
| | | | | |
| Method For Scheduling Thread Execution On A Limited Number Operating System | | 09/069,352 | | 04/29/98 |
| | | | | |
| Internet-Based Shared File Service With Native PC Client Access And Semantics And Distributed Access Control | | 09/704,050 | | 11/01/00 |
| | | | | |
| Internet-Based Shared File Service With Native PC Client Access And Semantics | | 09/704,262 | | 11/01/00 |
| | | | | |
| Dynamic Directory Service | | 10/704,327 | | 11/07/03 |
| | | | | |
| Internet-Based Shared File Service With Native PC Client Access And Semantics And Distributed Version Control | | 11/285,423 | | 11/21/05 |
| | | | | |
| System and Method For Providing Highly Available Data Storage Using Globally Addressable Memory | | 5,909,540 | | 06/01/99 |
| | | | | |
| Remote Access And Geographically Distributed Computers In A Globally Addressable Storage Environment | | 5,987,506 | | 11/16/99 |
| | | | | |
| Shared Client-Side Web Caching Using Globally Addressable Memory | | 6,026,474 | | 02/15/00 |
| | | | | |
| Dynamic Directory Service | | 6,647,393 | | 11/11/03 |
| | | | | |
| Distributed Virtual Web Cache Implemented Entirely in Software | | 6,760,756 | | 07/06/04 |
| | | | | |
| Internet-Based Shared File Service With Native PC Client Access And Semantics | | 7,058,696 | | 06/06/06 |
On January 10, 2007, the Company announced the sale of an aggregate of 2,400,000 shares of common stock, par value $.001 per share to a group of investors led by current stockholders. Through the private placement of its common stock, the Company raised aggregate gross proceeds of $1,200,000. One of the investors in the offering provided bridge financing to the Company on September 20, 2006 in the principal amount of $250,000. This principal amount and accrued interest of $6,463, was automatically converted into a subscription for Common Stock pursuant to the offering. The Company intends to utilize the net proceeds of the private placement to pay past due expenses and to fund its various patent litigations.
On April 25, 2007, the Company announced that its Mangomind Business Internet File Service now supports Microsoft’s Windows Vista. With the addition of Windows Vista, Mangomind runs on all of the most commonly used Windows PC business platforms, including Windows 97, 98, ME, NT, 2000, XP and Windows Server 2003.
The Company received gross proceeds of approximately $1,023,672 million through the issuance of common stock pursuant to a rights offering and as a consequence issued, commencing on or about February 27, 2008, approximately 2,047,344 shares of its common stock to stockholders who properly exercised their rights in the rights offering. Pursuant to the rights offering, which concluded as of the close of business on February 19, 2008, stockholders of record at the close of business on December 21, 2007, received, at no charge, a 0.7032 non-transferable right for each share of common stock owned by such stockholder on the record date. Each full right entitled the holder to purchase one share of the Company's common stock at a purchase price of $0.50 per share.
The Company expects to use approximately $750,000 of the net proceeds from the rights offering in connection with pursuing various intellectual property litigations to enforce the Company’s patent portfolio. The Company anticipates using the balance of the net proceeds from the rights offering for working capital purposes, including obtaining directors’ and officers’ insurance.
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted net loss per share reflects, in addition to the weighted average number of common shares, the potential dilution if stock options and warrants outstanding were exercised and/or converted into common stock, unless the effect of such equivalent shares was antidilutive.
For the three months ended March 31, 2008 and 2007, the effect of stock options and other potentially dilutive shares were excluded from the calculation of diluted net loss per common share as their inclusion would have been antidilutive.
The Company records revenue upon delivery if pervasive evidence of an arrangement exists, the price is fixed and determinable, delivery has occurred and collection is probable. Revenue for sales to distributors is recognized upon sales to end users. Service revenue is recognized as services are performed.
| 4. | STOCK-BASEDCOMPENSATION |
The Company currently has one stock-based compensation plan, which is described more fully in Note 7 in the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2007, as filed on March 30, 2008. As amended, this plan provides for the issuance of up to 296,297 shares of common stock to employees, officers, directors and consultants in the form of nonqualified and incentive stock options, restricted stock grants or other stock-based awards, including stock appreciation rights. The stock options are exercisable as specified at the date of grant and expire no later than ten years from the date of grant. As of March 31, 2008, there were 179,652 remaining options available under this plan.
Effective January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS 123R”), using the modified-prospective-transition method. Under this transition method, compensation cost to be recognized for the first three months of 2006 would include: (a) compensation cost for all stock-based payments granted, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock Based Compensation, and (b) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Results for prior periods have not been restated. There were no unvested stock based payments at January 1, 2006 and there were no stock based payments granted during the three months ended March 31, 2008 and 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements in this Quarterly Report that are not statements of historical facts are forward-looking statements, which involve risks and uncertainties. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from those indicated in the forward-looking statements as a result of the factors set forth elsewhere in this Quarterly Report on Form 10-Q, including under “Risk Factors.” You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements for the periods specified and the related notes included herein. Further reference should be made to our Annual Report on Form 10-KSB for the period ended December 31, 2007 filed with the Securities and Exchange Commission.
Overview
We market, sell and support Internet business software and services that improve the utility and effectiveness of Internet-based business applications. Our software solutions address the networking needs of small businesses, workgroups and large enterprises. Our products and services enhance the performance of PC networks and deliver improved service utilizing existing equipment. We no longer develop new software products or services.
MangomindSM is a multi-user, business-oriented, peer-to-peer file sharing system, allowing individual users to collaborate over the Internet across organizational boundaries in a safe and secure manner. The architecture is a blend of the manageability of client/server with the autonomy, clustering, and caching optimizations of peer-to-peer. The user experience is one of easy file sharing with colleagues through what looks like an ordinary LAN shared drive. MangomindSM provides the secure file sharing benefits of a VPN without additional hardware and configuration complexities. MangomindSM is sold as both a service and a standalone software product.
fileTRUSTSM is an online data storage service we purchased from Bank of America (formerly FleetBoston) in February 2002 for approximately $427,000, of which $175,000 was paid in cash and the balance in our common stock and warrants to purchase our common stock at $14.31 per share. fileTRUSTSM users can access their stored files from any Internet-connected system. The fileTRUSTSM service compliments our MangomindSM service by providing customers with a lower cost online storage system. In conjunction with our purchase of fileTRUSTSM, we executed a two-year enterprise license agreement with Bank of America (formerly FleetBoston) for the internal use of fileTRUSTSM by Bank of America (formerly FleetBoston), which expired in February 2004. The terms and conditions of this agreement provided for automatic renewals on a month-to-month basis.
Critical Accounting Policies
Our accounting policies are fully described in Note 2 in the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2007, as filed on March 30, 2008. The following describes the application of accounting principles that have significant impact on our unaudited consolidated financial statements:
Going Concern Assumption – The unaudited consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. If the unaudited consolidated financial statements were prepared on liquidation basis, the carrying value of our assets and liabilities would be adjusted to net realizable amounts. In addition, the classification of the assets and liabilities would be adjusted to reflect the liquidation basis of accounting.
Revenue Recognition – We recognize revenue generated from product sales when persuasive evidence of an arrangement exists, the price is fixed and determinable, delivery has occurred and collection is probable. We recognize revenue generated from the sale of the MangomindSM and fileTRUSTSM services as the service is provided. We recognize revenue generated from the sale of the MangomindSM product over the period of the first year’s maintenance agreement when persuasive evidence of the arrangement exists, the price is fixed and determinable, delivery and any required installation has been completed and collection is probable.
Stock-based Compensation – As part of our compensation programs offered to our employees, we grant stock options. In addition, we have engaged third-party consultants and advisors and have compensated them in the form of stock options. Compensation for stock options issued to employees is generally measured as the difference between the exercise price of the options granted and the fair value of our common stock on the date of grant. Compensation for stock options issued to third-party consultants and advisors is measured at the fair value on the date of grant, determined using the Black-Scholes valuation model. Because of the cashless exercise feature of the stock options granted in 1999 and the repricing of options granted in 2000 and 2003, we are required to remeasure the compensation related to these awards at each reporting date. As the quoted market price of our common stock fluctuates, our reported operating expenses will continue to fluctuate. These fluctuations can be significant.
Deferred Taxation – Because of the significant operating losses incurred and projected future operating losses, we have provided a full valuation allowance against the deferred tax assets created by our net operating loss carryforwards.
Costs and Expenses
Cost of services - Cost of services consist solely of the expenses we incur to administer and service the MangomindSM and fileTRUSTSM services. These expenses consist primarily of salaries and related personnel costs, the cost of our outsourced data center, the license royalties we pay to our e-security software provider for the encryption used in the MangomindSM service and the fees we pay to Built Right Networks to manage our billable services infrastructure.
Engineering and Development Expenses - Engineering and development expenses consist primarily of costs related to the design, development, testing, deployment and enhancement of our products and services. We have expensed our engineering and development costs as incurred. At March 31, 2008, there were no full time employees performing engineering or development on our products and services. We have outsourced the maintenance of our billable services infrastructure as well as product and customer support to Built Right Networks.
Other Operating Expenses – Selling and marketing expenses consist primarily of costs incurred to market our products and services such as the costs of attending and presenting at trade shows. General and administrative expenses consist primarily of salaries and related personnel costs and other general corporate costs such as facility costs, commercial and general liability insurance, accounting and legal expenses and other costs typical of a publicly held corporation. At March 31, 2008, there were no full time employees performing selling and marketing activities. Our remaining employee is performing general and administrative activities.
Reduction in Force – We have reduced our work force on four occasions since April 23, 2001 due to adverse economic conditions and our need to conserve capital. At March 31, 2008, we had one employee, working in a general and administrative capacity.
Results of Operations – Three Months Ended March 31, 2008 and 2007
Revenues for the three months ended March 31, 2008 increased $3,676 or 5.9% to $65,607 from $61,931 for the comparable period in 2007. No customer accounted for more than 10% of our revenues for either period.
We recognized $62,552 from the sale of our MangomindSM service and $3,055 from the sale of our fileTRUSTSM service during the three months ended March 31, 2008. During the comparable period in 2007, we recognized $59,063 from the sale of the MangomindSM service and $2,868 from the sale of our fileTRUSTSM service.
Cost of services for the three months ended March 31, 2008 increased $859 or 1.3% to $65,601 compared to $64,742 for the comparable period in 2007. The decrease in the cost of delivering our services was primarily a result of our continued reductions and our switch to a lower cost data center. In response to our loss of Bank of America (formerly FleetBoston) as a customer, we have instituted cost reductions to lessen the adverse effects of the loss of the Bank of America (formerly FleetBoston) revenues, including restructuring our business relationships with key vendors such as Built Right Networks.
For the three months ended March 31, 2008, other operating expenses including selling and marketing and general and administrative expenses increased $162,344 or 136% to $281,642 compared with $119,298 for the comparable period in 2007. The increase in other operating expenses was due primarily to legal costs incurred in pursuit of patents and in defense of our patents combined with a reduction of public relations, legal and other corporate consultants and facility rent in addition to reductions in our marketing, selling and general and administrative personnel associated with our work force reductions. During the three months ended March 31, 2008 and 2007, our one (1) full-time employee was working in a general and administrative capacity.
Our loss from operations increased $159,527 to $281,636 for the three months ended March 31, 2008 compared with a loss from operations of $122,109 for the comparable period in 2007 as a result of the above factors.
Interest income decreased $4,864 to $4,271 for the three months ended March 31, 2008 compared to $9,135 for the comparable period in 2007 due to the availability of working capital.
Financial Condition, Liquidity and Capital Resources
We were formed in June 1995 and, since our formation, have raised approximately $76,449,000 in financing from private placements of debt and equity securities. In addition to the financing we received through the sale of our securities, we have, at times, depended upon loans from stockholders and directors and credit from suppliers to meet interim financing needs. Borrowings from stockholders and directors have generally been refinanced with new debt instruments or converted into additional equity. At March 31, 2008, approximately $187,000 in additional financing was provided through accounts payable, accrued expenses and other trade credit.
On January 10, 2007, the Company completed the sale of an aggregate of 2,400,000 shares of common stock, par value $.001 per share to a group of investors led by current stockholders. Through the private placement of its common stock, the Company raised aggregate gross proceeds of $1,200,000. One of the investors in the offering provided bridge financing to the Company on September 20, 2007 in the principal amount of $250,000. This principal amount and accrued interest of $6,463 was automatically converted into a subscription for Common Stock pursuant to the offering. The Company intends to utilize the net proceeds of the private placement to pay past due expenses and to fund its various patent litigations
The Company received gross proceeds of approximately $1,023,672 through the issuance of common stock pursuant to a rights offering and as a consequence issued, completed on or about February 19, 2008, approximately 2,047,344 shares of its common stock to stockholders who properly exercised their rights in the rights offering. Pursuant to the rights offering, which concluded as of the close of business on February 19, 2008, stockholders of record at the close of business on December 21, 2007, received, at no charge, a 0.7032 non-transferable right for each share of common stock owned by such stockholder on the record date. Each full right entitled the holder to purchase one share of the Company’s common stock at a purchase price of $0.50 per share.
At March 31, 2008, we had a cash balance of $1,102,481 and working capital of approximately $921,000. We do not have any commercial commitments or off balance sheet financing. Our commitments are described in Note 9 in the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2007, as filed on March 30, 2008.
We did not make any capital expenditures during the three months ended March 31, 2008.
We have significantly modified our operations and reduced our work force on four separate occasions since April 2001. We currently have one (1) employee, working in a general and administrative capacity. We outsource the management of our billable services infrastructure, software code base, customer support and reseller channel management to Built Right Networks for approximately $21,000 per month, under an agreement, which can be cancelled with a ninety (90) day notice.
Unless we can generate significant on-going revenue, we will need additional sources of equity or debt financing. Although we have been successful in raising past financing, there can be no assurances that additional financing will be available to us on commercially reasonable terms, or at all.
As shown in the unaudited consolidated financial statements, during the three months ended March 31, 2008 and 2007, we incurred a net loss of $277,365 and $112,974, respectively. Cash used in operations during the three months ended March 31, 2008 and 2007 was $239,130 and $144,149, respectively. The factors, among others, raise significant doubt about our ability to continue as a going concern. Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow and meet our obligations on a timely basis and ultimately attain profitability.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any commercial commitments or off-balance sheet financing. Our commitments are described in Note 9 to our consolidated financial statements filed on Form 10-KSB for the period ended December 31, 2007, as reported to the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The accompanying unaudited consolidated financial statements include estimated fair value information as of March 31, 2008 as required by SFAS No. 107, “Disclosure About Fair Value of Financial Instruments”. Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments.
CASH
The carrying amounts approximate fair market value at March 31, 2008.
ITEM 4. CONTROLS AND PROCEDURES
We have significantly reduced our work force on several occasions during 2001 and 2002. At March 31, 2007 and 2008, we had one (1) employee, Mr. Dale Vincent, our President, Chief Executive Officer and sole director. A complete set of internal controls including segregation of duties is not possible in an organization of this size. However, we have implemented control procedures surrounding the maintenance of our accounting and financial systems and the safeguarding of our assets. Further, all transactions entered into outside the normal course of our day-to-day operations must be approved by Mr. Vincent.
Our principal executive and financial officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-KSB. Based on such evaluation, our principal executive and financial officer has concluded that as of such date, our disclosure controls and procedures were designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable SEC rules and forms and were effective.
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On November 22, 2002, the Company filed a complaint in the United States District Court of New Hampshire, against Oracle Corporation for infringement of U.S. Patent No. 6,148,377 and U.S. Patent No. 5,918,229. The complaint seeks unspecified monetary damages and injunctive relief and awards for interest, costs and attorneys’ fees.
On May 15, 2003, Oracle Corporation filed a complaint in the United States District Court, Northern District of California, against the Company and Built Right Networks for infringement of a patent held by Oracle Corporation. The complaint seeks unspecified monetary damages and injunctive relief and awards for interest, costs and attorneys’ fees.
On July 2, 2003, the Company filed a complaint in the United States District Court, Northern District of California, against Oracle Corporation, Sun Microsystems, Inc., Dell Computer Corporation and Electronic Arts, Inc. for infringement of U.S. Patent No. 6,148,377 and U.S. Patent No. 5,918,229. The complaint seeks unspecified monetary damages and injunctive relief and awards for interest, costs and attorneys’ fees.
On March 14, 2006, the U,S., District Court in New Hampshire ruled in favor of Oracle’s motion for summary judgment that did it did not infringe U.S. Patent No. 6,148,377 held by Mangosoft, Inc. Mangosoft had sued Oracle in 2002, claiming infringement of its patent on shared memory technology as described above.
On September 22, 2006, the Company through its subsidiary Mangosoft Intellectual Property, Inc., filed a civil action in the United States District Court for the Eastern District of Texas alleging patent infringement against eBay, Inc. of San Jose and its subsidiaries Skype Technologies SA and Skype Software Sarl of Luxembourg. The Complaint alleges that each of the defendants have infringed, and continue to infringe, U.S. Patent No. 6,647,393 entitled "Dynamic Directory Service" in violation of one or more provisions of 35 U.S.C. section 271. The complaint seeks damages for willful infringement as well as injunctive relief.
On October 26, 2006 Mangosoft Inc. was successful in its motion for summary judgment of non-infringement of United States Patent No. 6,371,790 in an action brought by Oracle International Corp. Oracle's motion for summary adjudication of patent validity, along with Mangosoft's motion to amend its final contentions of patent invalidity, and Oracle's motion to preclude Mangosoft from asserting a defense of inequitable conduct were denied by the United States District Chief Judge.
On March 29, 2007 the Company filed a Notice of Appeal in the United States District Court for the District of New Hampshire in the case of Mangosoft, Inc., et al. v. Oracle Corporation, C.A. No. 02-545-M. By filing the Notice of Appeal, Mangosoft has commenced an appeal in the United States Court of Appeals for the Federal Circuit challenging, among other things, the District Court’s claim construction Order of September 21, 2004, the District Court’s order granting defendant Oracle Corporation’s motion for summary judgment of non-infringement entered on March 14, 2006, and the District Court’s entry of final judgment entered on March 29, 2007.
Other than the matters listed above, there are no material pending legal proceedings, other than the routine litigation occurring in the normal course of operations, to which we are party or of which any of our properties are subject.
ITEM 1a. – Risk Factors
We Have A Limited Operating History And A History Of Substantial Operating Losses.
We have a history of substantial operating losses and an accumulated deficit of $90,010,846 as of March 31, 2008. For the three months ended March 31, 2008, our loss from operations was $277,365. For the year ended December 31, 2007 our loss from operations was $112,974. We have historically experienced cash flow difficulties primarily because our expenses have exceeded our revenues. We expect to incur additional operating losses. These factors, among others, raise significant doubt about our ability to continue as a going concern. If we are unable to generate sufficient revenue from our operations to pay expenses or we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations will be materially and adversely affected.
We Will Need Additional Financing.
We may require additional capital to finance our future operations. We can provide no assurance that we will obtain additional financing sufficient to meet our future needs on commercially reasonable terms or otherwise.
Our Success Depends On Our Outsourced Services Agreement.
Effective September 30, 2002, we outsourced the management of our internal information systems, billable services infrastructure, software code base, customer support and reseller channel management to Built Right Networks under our September 30, 2002 Information Management Services Agreement (the “Outsourced Services Agreement”). The principals of Built Right Networks are all former MangoSoft employees. Our contract represents a large majority of Built Right Networks’ revenue. We can provide no assurance that Built Right Networks will remain solvent or can retain their key personnel. Built Right Network’s inability to retain key personnel or to remain solvent would have a material and adverse effect on our business, financial condition and results of operations.
Our Performance Depends On Market Acceptance Of Our Products.
We expect to derive a substantial portion of our future revenues from the sales of MangomindSM and fileTRUSTSM. Due to our small size and need to conserve capital, our selling and marketing activities for these products and services is limited. If markets for our products fail to develop, develop more slowly than expected, are subject to substantial competition or react negatively to Bank of America’s (formerly FleetBoston) termination of its February 2002 enterprise license agreement with us, our business, financial condition and results of operations will be materially and adversely affected.
We Depend On Strategic Marketing Relationships.
We expect our future marketing efforts will focus in part on developing business relationships with technology companies that seek to augment their businesses by offering our products to their customers. Our inability to enter into and retain strategic relationships, or the inability of such technology companies to effectively market our products, could materially and adversely affect our business, operating results and financial condition.
There May Be Limited Liquidity In Our Common Stock And Its Price May Be Subject to Fluctuation.
Our common stock is currently traded on the OTC Bulletin Board and there is only a limited market for our common stock. We can provide no assurances that we will be able to have our common stock listed on an exchange or quoted on Nasdaq or that it will continue to be quoted on the OTC Bulletin Board. If there is no trading market for our common stock, the market price of our common stock will be materially and adversely affected.
SEC Rules Concerning Sales Of Low-Priced Securities May Hinder Re-Sales Of Our Common Stock
Because our common stock has a market price that is less than five dollars per share, our common stock is not listed on an exchange or quoted on Nasdaq and is traded on the OTC Bulletin Board. Brokers and dealers who handle trades in our common stock are subject to certain SEC disclosure rules when effecting trades in our common stock, including disclosure of the following: the bid and offer prices of our common stock, the compensation of the brokerage firm and the salesperson handling a trade and legal remedies available to the buyer. These requirements may hinder re-sales of our common stock and may adversely affect the market price of our common stock.
Rapidly Changing Technology And Substantial Competition May Adversely Affect Our Business.
Our business is subject to rapid changes in technology. We can provide no assurances that research and development by competitors will not render our technology obsolete or uncompetitive. We compete with a number of computer hardware and software design companies that have technologies and products similar to those offered by us and have greater resources, including more extensive research and development, marketing and capital than us. We can provide no assurances that we will be successful in marketing our existing products and developing and marketing new products in such a manner as to be effective against our competition. If our technology is rendered obsolete or we are unable to compete effectively, our business, operating results and financial condition will be materially and adversely affected.
Litigation Concerning Intellectual Property Could Adversely Affect Our Business.
We rely on a combination of trade secrets, copyright and trademark law, contractual provisions, confidentiality agreements and certain technology and security measures to protect our trademarks, patents, proprietary technology and know-how. However, we can provide no assurance that our rights in our intellectual property will not be infringed upon by competitors or that competitors will not similarly make claims against us for infringement. If we are required to be involved in litigation involving intellectual property rights, our business, operating results and financial condition will be materially and adversely affected.
Defects In Our Software Products May Adversely Affect Our Business.
Complex software such as the software developed by MangoSoft may contain defects when introduced and also when updates and new versions are released. Our introduction of software with defects or quality problems may result in adverse publicity, product returns, reduced orders, uncollectible or delayed accounts receivable, product redevelopment costs, loss of or delay in market acceptance of our products or claims by customers or others against us. Such problems or claims may have a material and adverse effect on our business, financial condition and results of operations.
We Have Limitations On The Effectiveness Of Our Internal Controls.
We have one full-time employee. This employee is engaged in general and administrative capacities. A complete set of internal controls is not possible in an organization of this size. Management does not expect that its disclosure controls or its internal controls will prevent all errors and intentional misrepresentations. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the organization have been detected.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Number | Description of Exhibit |
| 2.1 | Agreement and Plan of Merger by and among First American Clock Co., MangoSoft Corporation and MangoMerger Corp., dated as of August 27,1999. (1) |
| 3.1 | Articles of Incorporation, as amended. (2) |
| 3.2 | By-laws. (2) |
| 4.1 | Rights Plan. (6) |
| 10 | Lease of Westborough Office Park, Building Five, dated November 10, 1995. (3) |
| 14 | Code of Ethics. (7) |
| 21 | Subsidiary of the Registrant. (2) |
| 31.1 | Certification of Principal Executive Officer required by Rule 13a 14(a) or Rule 15-d14 (a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 99.1 | 1999 Incentive Compensation Plan, as amended and restated on May 1, 2000. (1) |
| 99.2 | Form of Subscription Agreement for purchase of common stock, dated as of March 20, 2000. (1) |
| 99.3 | Form of Warrant Agreement. (1) |
| 99.4 | Asset Purchase Agreement, dated February 11, 2002, between MangoSoft, Inc. and Fleet National Bank. (4) |
| 99.5 | Warrant Agreement, dated February 11, 2002, between MangoSoft, Inc. and Fleet National Bank. (4) |
| 99.6 | Information Management Services Agreement, dated September 30, 2002, between MangoSoft, Inc. and Built Right Networks LLC. (5) |
| 99.7 | Rights Agreement, dated March 14, 2003, between MangoSoft, Inc. and Interwest Transfer Co., Inc. (6) |
| | (1) | Filed as an exhibit to our Current Report on Form 8-K for an event dated September 7, 1999 and hereby incorporated by reference thereto. |
| | (2) | Filed as an exhibit to our Registration Statement on Form 10-SB, filed June 9, 2000, and hereby incorporated by reference thereto. |
| | (3) | Filed as an exhibit to our Quarterly Report filed November 9, 1999 for the quarter ended September 30, 1999 and hereby incorporated by reference thereto. |
| | (4) | Filed as an exhibit to our Quarterly Report filed August 14, 2002 for the quarter ended June 30, 2002 and hereby incorporated by reference thereto. |
| | (5) | Filed as an exhibit to our Current Report on Form 8-K for an event dated September 30, 2002 and hereby incorporated by reference thereto. |
| | (6) | Filed as an exhibit to our Current Report on Form 8-K for an event dated March 21, 2003, as amended on July 25, 2003, and hereby incorporated by reference thereto. |
| | (7) | Filed as an exhibit to our Annual Report filed on March 26, 2004 for the year ended December 31, 2003 and hereby incorporated by reference thereto. |
(b) Reports on Form 8-K:
| | (1) | On January 22, 2008, Form 8-K was filed indicating that its Board of Directors has extended the expiration date of its previously announced rights offering from January 29, 2008 to February 18, 2008. |
| | (2) | On January 29, 2008, Form 8-K was filed indicating that its Board of Directors has extended the expiration date of its previously announced rights offering from February 18, 2008 to February 19, 2008. |
| | (3) | On February 27, 2008, Form 8-K was filed indicating the closing and the results of its rights offering which ended as of the close of business on February 19, 2008. The Company received gross proceeds of approximately $1,023,672 and will issue approximately 2,047,344 shares of its common stock to its stockholders who properly exercised their rights in the rights offering. The Company expects to commence issuing the shares of common stock on or about February 27, 2008. |
SIGNATURE
In accordance with 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.
| May 15, 2008 | MANGOSOFT, INC. |
| | |
| | /S/ Dale Vincent |
| | Dale Vincent Chief Executive Officer (Principal Financial and Accounting Officer) |
