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 June 30, 2009
Commission File Number: 000-30781
MANGOSOFT, INC.
(Exact name of registrant as specified in its charter)
| Nevada | | 87-0543565 |
| (State or other jurisdiction | | (IRS Employer Identification No.) |
| of incorporation or organization) | | |
| | | |
| 29 Riverside St. , Ste A Box 8 | | |
| Nashua , NH | | 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 August 14, 2009, 5,443,157 shares of the Registrant’s common stock, par value $0.001 per share, were outstanding.
MANGOSOFT, INC. AND SUBSIDIARIES
INDEX
| | Page |
| |
| | |
| ITEM 1 – Condensed Consolidated Financial Statements (Unaudited): | |
| | |
| Balance Sheets as of June 30, 2009 and December 31, 2008 | 3 |
| Statements of Operations for the Three Months Ended June 30, 2009 and 2008 | 4 |
| Statements of Operations for the Six Months Ended June 30, 2009 and 2008 | 5 |
| Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 | 6 |
| Notes to Unaudited Condensed Consolidated Financial Statements | 7 |
| | |
| 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
(UNAUDITED)
| | | June 30, | | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| ASSETS | | | | | | |
| Current Assets: | | | | | | |
| Cash and cash equivalents | | $ | 641,813 | | | $ | 1,982,192 | |
| Accounts receivable | | | 17,325 | | | | 23,356 | |
| Note receivable - related party | | | 600,000 | | | | | |
| Investments | | | 493,200 | | | | | |
| Interest receivable | | | 7,000 | | | | | |
| Total assets | | $ | 1,759,338 | | | $ | 2,005,548 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable | | $ | 600 | | | $ | 153,177 | |
| Accrued compensation | | | - | | | | 3,076 | |
| Other accrued expenses | | | 41,372 | | | | 83,979 | |
| Total current liabilities | | | 41,972 | | | | 240,232 | |
| | | | | | | | | |
| 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; issued and outstanding, 5,443,157 shares. | | | 5,443 | | | | 5,443 | |
| Additional paid-in capital | | | 90,926,274 | | | | 90,926,274 | |
| Accumulated deficit | | | (89,214,371 | ) | | | (89,166,421) | |
| Total stockholders' equity | | | 1,717,366 | | | | 1,765,316 | |
| Total liabilities and stockholders' equity | | $ | 1,759,338 | | | $ | 2,005,548 | |
See notes to the unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | Three Months Ended June 30, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Service revenues | | $ | 38,304 | | | $ | 68,248 | |
| Costs and expenses: | | | | | | | | |
| Cost of services | | | 42,648 | | | | 65,452 | |
| General and administrative | | | 55,380 | | | | 302,173 | |
| Loss from operations | | | (59,724 | ) | | | (299,377 | ) |
| Investment income: | | | | | | | | |
| Dividend income | | | 4,501 | | | | — | |
| Gain on sale of investments | | | 60,696 | | | | — | |
| Unrealized investment gain | | | 13,904 | | | | — | |
| Interest income | | | 23,713 | | | | 6,066 | |
| Net Investment income | | | 102,814 | | | | 6,066 | |
| Net income (loss) | | $ | 43,090 | | | $ | (293,311 | ) |
| | | | | | | | | |
| Net income (loss) per share – basic and diluted | | $ | 0.01 | | | $ | (0.05 | ) |
| | | | | | | | | |
| Weighted average shares outstanding – basic and diluted | | | 5,443,157 | | | | 5,443,157 | |
See notes to the unaudited condensed consolidated financial statements.
MANGOSOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | Six Months Ended June 30, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Service revenues | | $ | 92,277 | | | $ | 133,855 | |
| Costs and expenses: | | | | | | | | |
| Cost of services | | | 101,486 | | | | 131,053 | |
| General and administrative | | | 149,456 | | | | 583,815 | |
| Loss from operations | | | (158,665 | ) | | | (581,013 | ) |
| Investment income: | | | | | | | | |
| Dividend income | | | 4,501 | | | | — | |
| Gain on sale of investments | | | 60,696 | | | | — | |
| Unrealized investment gain | | | 1,746 | | | | — | |
| Interest income | | | 43,772 | | | | 10,337 | |
| Net Investment income | | | 110,715 | | | | 10,337 | |
| Net loss | | $ | (47,950 | ) | | $ | (570,676 | ) |
| | | | | | | | | |
| Net loss per share – basic and diluted | | $ | (0.01 | ) | | $ | (0.12 | ) |
| | | | | | | | | |
| Weighted average shares outstanding – basic and diluted | | | 5,443,157 | | | | 4,796,196 | |
See notes to the unaudited condensed consolidated financial statements.
MANGOSOFT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNADUDITED)
| | | Six Months Ended June 30, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| CASH FLOWS USED IN OPERATING ACTIVITIES: | | | | | | |
| | | | | | | |
| Net loss | | $ | (47,950) | | | $ | (570,676 | ) |
| Adjustments to reconcile net loss to net cash used by operating activities: | | | | | | | | |
| Unrealized gain in marketable securities | | | (1,746) | | | | — | |
| Gain on sale of investments | | | (60,696) | | | | — | |
| Increase (decrease) in cash from the change in: | | | | | | | | |
| Accounts receivable | | | 6,031 | | | | (745) | |
| Accounts payable | | | (152,577 | ) | | | (52,804) | |
| Other accrued expenses | | | (45,683 | ) | | | 24,524 | |
| Net cash used in operating activities | | | (302,621 | ) | | | (599,701 | ) |
| | | | | | | | | |
| CASH FLOWS USED IN INVESTING ACTIVITIES: | | | | | | | | |
| Note receivable | | | (600,000 | ) | | | — | |
| Interest receivable | | | (7,000 | ) | | | — | |
| Proceeds from sale of investments | | | 155,086 | | | | | |
| Investments acquired | | | (585,844 | ) | | | — | |
| Net cash used in investing activities | | | (1,037,758 | ) | | | — | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Net proceeds from private placement of common stock | | | — | | | | 1,023,546 | |
| Net cash provided by financing activities | | | — | | | | 1,023,546 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | (1,340,379 | ) | | | 423,845 | |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 1,982,192 | | | | 318,065 | |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 641,813 | | | $ | 741,910 | |
| | | | | | | | | |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | |
| Cash paid for interest | | | NONE | | | | NONE | |
| Cash paid for income taxes | | | NONE | | | | NONE | |
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.
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, 2008 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission.
As shown in the unaudited condensed consolidated financial statements, during the six months ended June 30, 2009 and 2008, the Company incurred net losses of $47,950 and $570,676 respectively. Cash used in operations during the six months ended June 30, 2009 and 2008 was $302,621 and $599,701, 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.
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.
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 six months ended June 30, 2009 and 2008, 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, 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-BASED COMPENSATION |
The Company currently has one stock-based compensation plan, which is described more fully in Note 6 in the Company’s Annual Report on Form 10-K for the period ended December 31, 2008, as filed on March 30, 2009 . 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 June 30, 2009, there were 179,652 remaining options available under this plan.
The Company records stock based compensation under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment (“SFAS 123R”), Compensation cost for all stock-based payments granted is, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. There were no stock based payments granted during the six months ended June 30, 2009 and 2008.
| 5. | RELATED PARTY TRANSACTIONS |
Note receivable – related party represents an amount pursuant to an agreement entered into on January 29, 2009. Under this agreement MangoSoft, Inc. (the “Company” or “MangoSoft”) agreed to loan $600,000 to Plaintiff Holding XI LLC, a newly formed wholly owned subsidiary (the “Subsidiary”) of Plaintiff Funding Holding, Inc., d/b/a LawCash (“LawCash”). Such $600,000 loan (the “Loan”) is evidenced by a secured promissory note issued by the Subsidiary to MangoSoft having a term of one (1) year and bearing interest at the rate of 14% per annum (the “MangoSoft Secured Note”). LawCash, through its various subsidiaries, is in the business of financing litigations, and the proceeds of the Loan will be used to fund various plaintiffs’ receivables in the normal course of LawCash’s business. The Subsidiary’s obligations with respect to the MangoSoft Secured Note are guaranteed by LawCash (the “LawCash Guarantee”), and in addition, Mr. Selig Zises has agreed to guarantee up to $120,000 of losses incurred by the Company in connection with the MangoSoft Secured Note (the “Loss Guarantee”). Each of the Company and LawCash are directly or indirectly controlled by Mr. Selig Zises and Mr. Jay Zises.
During the three months ended June 30, 2009 the Company paid consulting fees in the amount of $15,000 to the widow of Dale Vincent, a stockholder and sole employee and director of the Company until he passed away on April 22, 2009.
Investments include certain marketable securities with a fair value of $93,200 at June 30, 2009, which areheld in a brokerage account. Fair value is determined for this investment using quoted prices in an active market. This pricing methodology applies to Level 1 investments in the fair value hierarchy.
On May 22, 2009, the Company purchased from Plaintiff Funding Holding, Inc., d/b/a LawCash (“LawCash”), for the sum of $400,000 (the “Purchase Price”), all of LawCash’s rights, title and interest in certain specified litigations that had been funded by LawCash (the “Cases”). LawCash, through its various subsidiaries, is in the business of financing personal injury litigations, such as the Cases, and in connection therewith, receives a contingent interest in the proceeds of the potential recovery by a personal injury claimant or litigant. In accordance with the bill of sale entered into on May 22, 2009 by the Company and LawCash pursuant to which the Company acquired the Cases (the “Bill of Sale”), LawCash will service the Cases pursuant to a master services agreement dated May 22, 2009 (the “Master Services Agreement”) and the Company is entitled to receive from the disposition of the Cases (i) the return of the Purchase Price, and (ii) a return on the Purchase Price of 14% per annum. This investment is recorded at fair value using significant observable inputs other than quoted market prices and are considered to be level 2 investments in the fair value hierarchy.
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-K for the period ended December 31, 2008 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.
Mangomind SM 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. Mangomind SM provides the secure file sharing benefits of a VPN without additional hardware and configuration complexities. Mangomind SM is sold as both a service and a standalone software product.
fileTRUST SM is an online data storage service. fileTRUST SM users can access their stored files from any Internet-connected system. The fileTRUST SM service complements our Mangomind SM service by providing customers with a lower cost online storage system.
Costs and Expenses
Cost of services - Cost of services consist solely of the expenses we incur to administer and service the Mangomind SM and fileTRUST SM 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 Mangomind SM service and the fees we pay to Built Right Networks to manage our billable services infrastructure.
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 June 30, 2009, all operating activities were outsourced.
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 June 30, 2009, we had no employees and outsourced all functions.
Results of Operations – Three Months Ended June 30, 2009 and 2008
Revenues for the three months ended June 30, 2009 decreased $29,944 or 43.9% to $38,304 from $68,248 for the comparable period in 2008. The decrease was due to a reduction in customers. No customer accounted for more than 10% of our revenues for either period.
We recognized $34,749 from the sale of our Mangomind SM service and $3,555 from the sale of our fileTRUST SM service during the three months ended June 30, 2009. During the comparable period in 2008, we recognized $64,922 from the sale of the Mangomind SM service and $3,326 from the sale of our fileTRUST SM service.
Cost of services for the three months ended June 30, 2009 decreased $22,804 or 34.8% to $42,648 compared to $65,452 for the comparable period in 2008. The decrease in the cost of delivering our services was primarily a result of ourlower sales volume.
For the three months ended June 30, 2009, other operating expenses including selling and marketing and general and administrative expenses decreased $246,793 or 81.7% to $55,380 compared with $302,173 for the comparable period in 2008. The decrease in other operating expenses was due primarily to a decrease in legal costs incurred in pursuit and defense of our patents combined with a reduction of public relations, legal and other corporate consultants. For the three months ended June 30, 2008, our one (1) full-time employee was working in a general and administrative capacity. For the three months ended June 30, 2009, we had no employees and outsourced all functions
Our loss from operations decreased $239,653 to $59,724 for the three months ended June 30, 2009 compared with a loss from operations of $299,377 for the comparable period in 2008, as a result of the above factors.
For the three months ended June 30, 2009, there was $60,696 in realized gains on the sale of investments, $4,501 in dividend income and $13,904 in unrealized gains from investments held at Ladenburg Thalmann.
Interest income increased $17,647 to $23,713 for the three months ended June 30, 2009 compared to $6,066 for the comparable period in 2008 due to the availability of working capital and addition of the note receivable.
Results of Operations – Six Months Ended June 30, 2009 and 2008
Revenues for the six months ended June 30, 2009 decreased $41,578 or 31.1% to $92,277 from $133,855 for the comparable period in 2008.
The decrease was due to a reduction in customers. No customer accounted for more than 10% of our revenues for either period.
We recognized $85,949 from the sale of our MangomindSM service and $6,328 from the sale of our fileTRUSTSM service during the six months ended June 30, 2009. During the comparable period in 2008, we recognized $127,475 from the sale of the MangomindSM service and $6,380 from the sale of our fileTRUSTSM service.
Cost of services for the six months ended June 30, 2009 decreased $29,567 or 22.6% to $101,486 compared to $131,053 for the comparable period in 2008. The decrease in the cost of delivering our services was primarily a result of lower sales volume.
For the six months ended June 30, 2009, other operating expenses including selling and marketing and general and administrative expenses decreased $434,359 or 74.4% to $149,456 compared with $583,815 for the comparable period in 2008. The decrease 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 six months ended June 30, 2008, our one (1) full-time employee was working in a general and administrative capacity. During the six months ended June 30, 2009, we began outsourcing all functions.
Our loss from operations decreased $422,348 to $158,665 for the six months ended June 30, 2009 compared with a loss from operations of $581,013 for the comparable period in 2008 as a result of the above factors.
For the six months ended June 30, 2009, there was $60,696 in realized gains on the sale of investments, $4,501 in dividend income and $1,746 in unrealized gains from investments held at Ladenburg Thalmann.
Interest income increased $33,435 to $43,772 for the six months ended June 30, 2009 compared to $10,337 for the comparable period in 2008 due to the availability of working capital and addition of the note receivable.
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 June 30, 2009, approximately $42,000 in additional financing was provided through accounts payable, accrued expenses and other trade credit.
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.
On January 29, 2009, Form 8-K was filed indicating that Mangosoft agreed to loan $600,000 to Plaintiff Holding XI LLC, a newly formed wholly owned subsidiary (the “Subsidiary”) of Plaintiff Funding Holding, Inc., d/b/a LawCash. Such loan is evidenced by a secured promissory note issued by the Subsidiary to Mangosoft having a term of one year and bearing interes t at the rate of 14% per annum.
At June 30, 2009, we had a cash balance of $641,813 and working capital of approximately $1,717,366. We do not have any commercial commitments or off balance sheet financing. Our commitments are described in Note 8 in the Company’s Annual Report on Form 10-K for the period ended December 31, 2008, as filed on March 30, 2009.
We did not make any capital expenditures during the three months ended June 30, 2009.
We have significantly modified our operations and reduced our work force on four separate occasions since April 2001. We currently outsource the management of our billable services infrastructure, software code base, customer support and reseller channel management to Built Right Networks. Built Right Networks receives a fee based on the percentage of monthly income earned plus an administration fee.
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.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any commercial commitments or off-balance sheet financing. Our commitments are described in Note 8 to our consolidated financial statements filed on Form 10-K for the period ended December 31, 2008, 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 June 30, 2009 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 June 30, 2009.
NOTE RECEIVABLE
The carrying amounts approximate fair market value at June 30, 2009.
INVESTMENTS
The carrying amounts approximate fair market value at June 30, 2009.
In accordance with SFAS 159, the company is recording unrealized gains/(losses) on the Statement of Operations.
ITEM 4. CONTROLS AND PROCEDURES
At June 30, 2009, we had no employees and outsourced all functions. 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. Selig Zises, Interim Chief Executive Officer.
Our Chief Executive Officer, President and sole director, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q (the "Evaluation Date"), has concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosure.
We have identified deficiencies in the design or operation of the Company’s internal controls that we consider to be material weaknesses in the effectiveness of the Company’s internal controls pursuant to standards established by the Public Company Accounting Oversight Board. A “material weakness” is a deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Specifically, we found that the Company has an overall lack of segregation of duties as well as a lack of necessary corporate accounting resources related to the financial reporting process and accounting functions as the Company does not have any full time accounting personnel. The Company’s President serves as both Chief Executive Officer and Chief Financial Officer of the Company. Accordingly, certain functional and monitoring controls do not exist.
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 June 30, 2009 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 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 Lu xembourg. 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.
On May 14, 2008, Form 8-K was filed indicating that the United States Court of Appeals for the Federal Circuit issued an opinion in the case Mangosoft, Inc. et al. v. Oracle Corporation. The opinion affirmed the District Court’s claim construction order of September 21, 2004 and the District’s Court’s decision granting defendant’s motion for summary judgment on non-infringement entered by the District Court on March 28, 2007.
On December 4, 2008, Form 8-K was filed indicating that Mangosoft, Inc. entered into an agreement to settle its patent litigation with Skype Technologies SA, Skype Software SARL and eBay Inc. titled Mangosoft Intellectual Property, Inc. V. Skype Technologies, S.A. et al., Civil Action No. 2:06CV-390 TJW, which was pending in the United States District Court for the Eastern District of Texas. Under the terms of the Agreement, eBay and its affiliates and subsidiaries will receive a non-exclusive license to all of the patents or patent applications now owned by the Company, or in which the Company has a controlling interest, for a one time fee in the amount of $2,300,000. The Agreement also provides for general releases and dismisses the existing litigation between the parties.
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 $ 89,214,371 as of June 30, 2009. For the six months ended June 30, 2009, our loss was $158,665 .
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.
However, for the year ended December 31, 2008 we had income from operations of $547,660. This was primarily due to litigation settlement income, which is described in Note 3 to our consolidated financial statements filed on Form 10- K for the period ended December 31, 2008.
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. 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 Mangomind SM and fileTRUST SM . 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 no employees and all our functions are outsourced. 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. |
| | |
| (4) | On May 14 2008, Form 8-K was filed indicating that the United States Court of Appeals for the Federal Circuit issued an opinion in the case Mangosoft, Inc. et al. v. Oracle Corporation. The opinion affirmed the District Court’s claim construction order of September 21, 2004 and the District Court’s decision granting defendant’s motion for summary judgment on non-infringement entered by the District Court on March 28, 2007. |
| | |
| (5) | On December 4, 2008, Form 8-K was filed indicating that Mangosoft, Inc. entered into an agreement to settle its patent litigation with Skype Technologies SA, Skype Software SARL and eBay Inc. titled Mangosoft Intellectual Property, Inc. V. Skype Technologies, S.A. et al., Civil Action No. 2:06CV-390 TJW, which was pending in the United States District Court for the Eastern District of Texas. Under the terms of the Agreement, eBay and its affiliates and subsidiaries will receive a non-exclusive license to all of the patents or patent applications now owned by the Company, or in which the Company has a controlling interest, for a one time fee in the amount of $2,300,000. The Agreement also provides for general releases and dismisses the existing litigation between the parties. |
| | |
| (6) | On January 29, 2009, Form 8-K was filed indicating that Mangosoft agreed to loan $600,000 to Plaintiff Holding XI LLC, a newly formed wholly owned subsidiary (the “Subsidiary”) of Plaintiff Funding Holding, Inc., d/b/a LawCash. Such loan is evidenced by a secured promissory note issued by the Subsidiary to Mangosoft having a term of one year and bearing interes t at the rate of 14% per annum. Each of the Company and LawCash are directly or indirectly controlled by Mr. Selig Zises and Mr. Jay Zises. |
| (7) | On April 22, 2009, Dale Vincent, the Chief Executive Officer and President and sole Director and sole employee of MangoSoft, Inc. (the “Company”), passed away. As a result of the vacancy created by the death of Mr. Vincent, on April 28, 2009, Selig Zises was elected as a Director of the Company by written consent of a majority of the stockholders of the Company in lieu of a stockholders’ meeting. Thereafter, Mr. Zises appointed himself as Interim Chief Executive Officer and Interim Secretary of the Company. Mr. Zises will not receive any compensation as an officer or director of the Company. Mr. Zises is 67 years of age and has been a private investor for the past five (5) years. There is no family relationship between Selig Zises and any other former executive officer or director of the Company, and there is no arrangement or understanding under which Selig Zises was appointed Director, Interim Chief Executive Officer or Interim Secretary. |
| (8) | On May 22, 2009, MangoSoft, Inc. (the “Company” or “MangoSoft”) agreed to purchase from Plaintiff Funding Holding, Inc., d/b/a LawCash (“LawCash”), for the sum of $400,000 (the “Purchase Price”), all of LawCash’s rights, title and interest in certain specified litigations that had been funded by LawCash (the “Cases”). LawCash, through its various subsidiaries, is in the business of financing personal injury litigations, such as the Cases, and in connection therewith, receives a contingent interest in the proceeds of the potential recovery by a personal injury claimant or litigant. In accordance with the bill of sale entered into on May 22, 2009 by the Company and LawCash pursuant to which the Company acquired the Cases (the “Bill of Sale”), LawCash will service the Cases pursuant to a master services agreement dated May 22, 2009 (the “Master Services Agreement”) and the Company is entitled to receive from the disposition of the Cases (i) the return of the Purchase Price, and (ii) a return on the Purchase Price of 14% per annum.. |
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.
| August 14, 2009 | MANGOSOFT, INC. |
| | |
| | /S/ Selig Zises |
| | Selig Zises Interim Chief Executive Officer |
