U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Quarterly Period Ended June 30, 2003
or
¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the Transition Period From To
Commission File Number: 000-30781
MANGOSOFT, INC.
(Exact name of small business issuer as specified in its charter)
| Nevada | 87-0543565 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |
| 12 Pine Street Extension Nashua, NH | 03060 | |
| (Address of principal executive offices) | (Zip code) | |
Issuer’s telephone number: (508) 871-7300
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No¨
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:
| Common Stock | 1,013,038 Shares | |
$0.001 Par Value | (Outstanding on August 13, 2003) |
MANGOSOFT, INC. AND SUBSIDIARY
| Page | ||
PART I. FINANCIAL INFORMATION | ||
ITEM 1 – Condensed Consolidated Financial Statements (unaudited): | ||
| 3 | ||
Statements of Operations for the Three Months Ended June 30, 2003 and 2002 | 4 | |
Statements of Operations for the Six Months Ended June 30, 2003 and 2002 | 5 | |
Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002 | 6 | |
| 7 | ||
ITEM 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | 11 | |
| 19 | ||
| 20 | ||
| 20 | ||
| 21 | ||
| 23 | ||
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MANGOSOFT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2003 | December 31, 2002 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 164,153 | $ | 425,369 | ||||
Short-term investments | 621,051 | 608,317 | ||||||
Accounts receivable | 18,896 | 20,226 | ||||||
Prepaid expenses and other current assets | 57,845 | 98,660 | ||||||
Total current assets | 861,945 | 1,152,572 | ||||||
Property and equipment – net | 116,827 | 240,019 | ||||||
Long-term investments | 459,500 | 507,080 | ||||||
Intangibles and other assets, net | 199,917 | 260,250 | ||||||
Total | $ | 1,638,189 | $ | 2,159,921 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts payable | $ | 724,123 | $ | 707,123 | ||||
Accrued compensation | 29,388 | 23,142 | ||||||
Other accrued expenses and current liabilities | 259,210 | 285,639 | ||||||
Total current liabilities | 1,012,721 | 1,015,904 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ Equity: | ||||||||
Common stock | 1,013 | 1,013 | ||||||
Additional paid-in capital | 88,646,461 | 88,660,123 | ||||||
Deferred compensation | (1,976 | ) | (17,976 | ) | ||||
Accumulated deficit | (88,020,030 | ) | (87,499,143 | ) | ||||
Total stockholders’ equity | 625,468 | 1,144,017 | ||||||
Total | $ | 1,638,189 | $ | 2,159,921 | ||||
See notes to the unaudited condensed consolidated financial statements.
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MANGOSOFT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Three Months Ended June 30, | ||||||||
| 2003 | 2002 | |||||||
| (Unaudited) | ||||||||
Software license revenues | $ | 15,634 | $ | 5,553 | ||||
Service revenues | 115,687 | 111,706 | ||||||
Total revenues | 131,321 | 117,259 | ||||||
Costs and expenses: | ||||||||
Cost of services (1) | 131,095 | 227,615 | ||||||
Engineering and development (1) | 839 | 802,602 | ||||||
Selling and marketing (1) | — | 271,733 | ||||||
General and administrative (1) | 283,160 | 922,979 | ||||||
Stock-based compensation expense | 258 | 174,349 | ||||||
Loss from operations | (284,031 | ) | (2,282,019 | ) | ||||
Interest income | 31,231 | 18,805 | ||||||
Net loss | $ | (252,800 | ) | $ | (2,263,214 | ) | ||
Net loss per share – basic and diluted | $ | (0.25 | ) | $ | (2.23 | ) | ||
Weighted average shares outstanding – basic and diluted | 1,013,038 | 1,013,038 | ||||||
(1) Excludes stock-based compensation expense as follows: | ||||||||
Cost of services | $ | — | $ | 16,125 | ||||
Engineering and development | — | 71,518 | ||||||
Selling and marketing | — | 4,609 | ||||||
General and administrative | 258 | 82,097 | ||||||
See notes to the unaudited condensed consolidated financial statements.
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MANGOSOFT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| Six Months Ended June 30, | ||||||||
| 2003 | 2002 | |||||||
| (Unaudited) | ||||||||
Software license revenues | $ | 37,033 | $ | 7,053 | ||||
Service revenues | 235,256 | 201,674 | ||||||
Total revenues | 272,289 | 208,727 | ||||||
Costs and expenses: | ||||||||
Cost of services (1) | 258,962 | 425,776 | ||||||
Engineering and development (1) | 4,205 | 1,497,335 | ||||||
Selling and marketing (1) | 3,843 | 570,163 | ||||||
General and administrative (1) | 580,850 | 1,952,890 | ||||||
Stock-based compensation expense | 2,338 | 355,448 | ||||||
Loss from operations | (577,909 | ) | (4,592,885 | ) | ||||
Interest income | 57,022 | 47,237 | ||||||
Net loss | $ | (520,887 | ) | $ | (4,545,648 | ) | ||
Net loss per share – basic and diluted | $ | (0.51 | ) | $ | (4.50 | ) | ||
Weighted average shares outstanding – basic and diluted | 1,013,038 | 1,010,030 | ||||||
(1) Excludes stock-based compensation expense as follows: | ||||||||
Cost of services | $ | — | $ | 32,250 | ||||
Engineering and development | 1,798 | 143,036 | ||||||
Selling and marketing | — | 15,968 | ||||||
General and administrative | 540 | 164,194 | ||||||
See notes to the unaudited condensed consolidated financial statements.
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MANGOSOFT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended June 30, | ||||||||
| 2003 | 2002 | |||||||
| (Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (520,887 | ) | $ | (4,545,648 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
Depreciation and amortization | 183,525 | 336,427 | ||||||
Stock-based compensation | 2,338 | 355,448 | ||||||
Unrealized investment gains | (42,457 | ) | — | |||||
Increase (decrease) in cash from the change in: | ||||||||
Accounts receivable | 1,330 | (104,713 | ) | |||||
Prepaid expenses and other current assets | 40,815 | 45,515 | ||||||
Accounts payable | 17,000 | 293 | ||||||
Accrued compensation | 6,246 | 67,745 | ||||||
Other accrued expenses and current liabilities | (26,429 | ) | 113,946 | |||||
Net cash used by operating activities | (338,519 | ) | (3,730,987 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Acquisition of property and equipment | — | (29,347 | ) | |||||
Cash paid for fileTRUST assets | — | (175,000 | ) | |||||
Cash paid for short and long-term investments | (162,704 | ) | — | |||||
Investment maturities | 240,007 | — | ||||||
Net cash provided by (used by) investing activities | 77,303 | (204,347 | ) | |||||
NET DECREASE IN CASH AND CASH EQUIVALENTS | (261,216 | ) | (3,935,334 | ) | ||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 425,369 | 6,911,906 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 164,153 | $ | 2,976,572 | ||||
NON CASH ACTIVITIES: | ||||||||
Fair value of common stock and warrants issued in connection with the purchase of | $ | — | $ | 252,000 | ||||
See notes to the unaudited condensed consolidated financial statements.
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MANGOSOFT, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| 1. | NATURE OF BUSINESS AND BASIS OF PRESENTATION |
MangoSoft, Inc. and subsidiary (the “Company”) develop Internet business software and services that improve the utility and effectiveness of Internet-based business applications. The Company develops, markets and supports software solutions to 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.
On March 7, 2003, the Company completed its 1-for-27 reverse stock split. As a result of this reverse stock split, the Company’s authorized shares of common stock decreased to 3,703,704, of which 1,013,038 were issued and outstanding.
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.
As shown in the unaudited condensed consolidated financial statements, during the six months ended June 30, 2003 and 2002, the Company incurred net losses of $520,887 and $4,545,648, respectively. Cash used in operations during the six months ended June 30, 2003 and 2002 was $338,519 and $3,730,987, 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 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, 2002 included in the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission.
| 2. | NET LOSS 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, 2003 and 2002, 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.
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| 3. | STOCK-BASED COMPENSATION |
The Company currently has one stock-based compensation plan, which is described more fully in Note 8 in the Company’s Annual Report on Form 10-KSB for the period ended December 31, 2002, as filed on March 31, 2003. 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, 2003, there were 210,466 remaining options available under this plan.
The Company accounts for this plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. Equity instruments issued to non-employees are accounted for in accordance with the provisions of Statement of Financial Accounting Standard (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and Emerging Issues Task Force (“EITF”) Abstract No. 96-18, “Accounting for Equity Instruments That Are Issued To Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”
In December 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This Statement amends the transition and disclosure requirements of SFAS No. 123 with respect to the implementation of the fair value method of accounting for options. In addition, SFAS No. 148 amends the disclosure requirements for SFAS No. 123 to require prominent disclosures in both annual and interim financial statements. On December 15, 2002, the Company adopted the disclosure requirements of SFAS No. 148.
The following table illustrates the effect on net loss and net loss per share if the Company applied the fair value recognition provision of SFAS No. 123 to stock-based employee compensation:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net loss as reported | $ | (252,800 | ) | $ | (2,263,214 | ) | $ | (520,887 | ) | $ | (4,545,648 | ) | ||||
Add back stock-based compensation included in the determination of net loss as reported | 258 | 174,349 | 2,338 | 355,448 | ||||||||||||
Less stock-based compensation has all options been recorded at fair value | (29,283 | ) | (674,759 | ) | (72,900 | ) | (1,377,785 | ) | ||||||||
Adjusted net loss | $ | (281,825 | ) | $ | (2,763,524 | ) | $ | (591,449 | ) | $ | (5,567,985 | ) | ||||
Weighted average shares outstanding, basic and diluted | 1,013,038 | 1,013,038 | 1,013,038 | 1,010,030 | ||||||||||||
Net loss per share, basic and diluted, as reported | $ | (0.25 | ) | $ | (2.23 | ) | $ | (0.51 | ) | $ | (4.50 | ) | ||||
Adjusted net loss per share, basic and diluted | $ | (0.28 | ) | $ | (2.73 | ) | $ | (0.58 | ) | $ | (5.51 | ) | ||||
Under APB No. 25, stock options that include stock appreciation rights (“SARs”) are accounted for as variable awards and compensation expense is measured at each reporting date based on the difference between the exercise price and the market price of the common stock. For unvested awards, compensation
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expense is recognized over the vesting period; for vested awards, compensation expense is adjusted up or down at each reporting date based on changes in the market price of the common stock. At June 30, 2003 and 2002, there were 40,874 and 63,025 outstanding options, respectively, to purchase the Company’s common stock that included SARs.
On April 3, 2001, the Company’s Board of Directors resolved to reprice options to purchase 95,710 shares of the Company’s common stock. The options were originally issued between October 1999 and December 2000 and had exercise prices ranging from $50.76 to $135.00 per share. The exercise price for these options was reduced to $27.81, the closing market value of the Company’s common stock as of the repricing date. The repriced options continue to vest according to the original grant date. These options are now accounted for as variable awards, similar to the SARs. At June 30, 2003 and 2002, there were 26,222 and 84,580 outstanding options, respectively, to purchase the Company’s common stock that were repriced and subject to variable plan accounting.
During the six months ended June 30, 2003 and 2002, the Company recorded stock-based compensation expense of $2,338 and $355,448. These amounts represents the amortization of deferred stock-based compensation recognized as the result of the Company’s issuance of stock options to employees at exercise prices less than the quoted market price on the grant date. The Company did not record any stock-based compensation on stock options accounted for as variable awards for the six months ended June 30, 2003 and 2002 because the closing market price of the Company’s common stock was less than the exercise price of these options.
| 4. | RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
In November 2002, the Emerging Issues Task Force (“EITF”) finalized its consensus on EITF Issue 00-21, “Revenue Arrangements with Multiple Deliverables,” which provides guidance on the method of revenue recognition for sales arrangements that include the delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. Under EITF 00-21, revenue must be allocated to all deliverables regardless of whether an individual element is incidental or perfunctory. The Company does not believe that the adoption of EITF-00-21 will have a material impact on the Company’s results of operations or financial position.
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” (“FIN 46”) which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” relating to consolidation of certain entities. FIN 46 will require identification of the Company’s participation in variable interest entities (“VIEs”), which are defined as entities with a level of invested equity that is not sufficient to fund future activities to permit it to operate on a standalone basis. For entities identified as a VIE, FIN 46 sets forth a model to evaluate potential consolidation based on an assessment of which party to the VIE (if any) bears a majority of the exposure to its expected losses or stands to gain from a majority of its expected returns. The interpretation is effective after January 31, 2003 for any VIE created after that date and is effective July 1, 2003 for VIEs created before February 1, 2003. The Company believes that the adoption of FIN 46 will not have a material impact on the Company’s results of operations or financial position.
In April 2003, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. The Company believes that the adoption of SFAS No. 149 will not have a material impact on the Company’s results of operations or financial position.
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In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company believes that the adoption of SFAS No. 150 will not have a material impact on the Company’s results of operations or financial position.
| 5. | SUBSEQUENT EVENTS |
On July 23, 2003, the Company completed the private placement of 20,000 shares of Series B Convertible Preferred Stock (the “Preferred Stock”) to two significant shareholders, one of which was the Company’s former co-chairman of its Board of Directors. The Company received $50,000 in connection with this private placement. The Preferred Stock has no stated dividend rate. Each share of Preferred Stock is convertible into one share of common stock at the option of the holder. In addition to its convertible features, the holders of the Preferred Stock are entitled to twenty-five votes per share of Preferred Stock on any matter brought to the vote of shareholders.
On July 24, 2003, the Company amended its outstanding and vested stock options granted to its Chief Executive Officer. Vested and outstanding options to purchase 22,222 and 14,815 shares of the Company’s common stock at $27.81 and $33.75 per share, respectively, were cancelled. The Company granted its Chief Executive Officer options to purchase 37,037 shares of its common stock at an exercise price of $1.00 per share. The newly granted options are completely vested. Compensation expense for this modification will be approximately $31,000 and will be recognized in July 2003.
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| ITEM | 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-QSB 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-QSB, including under “Risk Factors.” You should read the following discussion and analysis together with our 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, 2002 filed with the Securities and Exchange Commission.
Overview
We develop Internet business software and services that improve the utility and effectiveness of Internet-based business applications. We develop, market and support software solutions to 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.
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. Mangomind provides the secure file sharing benefits of a VPN without additional hardware and configuration complexities. Mangomind is sold as both a service and a standalone software product.
fileTRUSTSM is an online data storage service we purchased from FleetBoston Financial Corporation (“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. fileTRUST users can access their stored files from any Internet-connected system. The fileTRUST service compliments our Mangomind service by providing customers with a lower cost online storage system. In conjunction with our purchase of fileTRUST, we executed a two-year enterprise license agreement with FleetBoston for the internal use of fileTRUST by FleetBoston. We expect to receive approximately $350,000 in revenues over this two-year period from the sale of the fileTRUST service to FleetBoston.
Cachelink™ is a peer-to-peer clustered web cache. Cachelink utilizes our peer-to-peer clustering technology to efficiently link together the individual browser caches of multiple systems on a LAN into an aggregated “super cache,” resulting in much faster Internet access without the expense of a dedicated hardware caching appliance or server. Cachelink is a pure peer-to-peer architecture, including a completely decentralized directory. The product is self-configuring and self-healing from any number of system failures.
The adverse economic environment and our need to conserve capital have forced us to reduce our work force and restructure our operations on several occasions over the past two years. Effective June 30, 2003, we have three (2) employees, each working in a general and administrative capacity, and have outsourced our information technology infrastructure, billable services infrastructure, software code base and reseller network to a third party whose principals are all former employees. We believe that this outsourced relationship will not impair our ability to deliver our products and services.
In November 2002, we filed a complaint against Oracle Corporation (“Oracle”) for infringement of two of our patents. In May 2003, Oracle filed a complaint against us seeking unspecified monetary damages and injunctive relief, amongst other remedies, for infringement of a patent held by Oracle. In July 2003, we filed a complaint against Oracle, Sun Microsystems, Inc., Dell Computer Corporation and Electronic Arts Inc. for infringement of two of our patents.
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Critical Accounting Policies
Our accounting policies are described in our Annual Report on Form 10-KSB for the period ended December 31, 2002 filed with the Securities and Exchange Commission. The following describes the application of accounting principles that have a significant impact on our consolidated financial statements:
Going Concern Assumption – The 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 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 the sale of Cachelink 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 Mangomind and fileTRUST services as the service is provided. We recognize revenue generated from the sale of the Mangomind 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.
Investments – At June 30, 2003, we have approximately $1.1 million invested in several high-yield, secured corporate notes to better maximize our rate of return on our cash. These investments represent a significant portion of our total assets at June 30, 2003. These investments are classified as held-to-maturity and are carried at their amortized cost. Investments and maturities of less than one year are classified as short-term investments.
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, 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 software license revenues and cost of services – Cost of software license revenues primarily consist of disk replication costs and other costs we incur in connection with sales of Cachelink. Cost of services consist solely of the expenses we incur to administer and service the Mangomind and fileTRUST 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 service and the fees we pay to Built Right Networks to manage our billable services infrastructure.
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Engineering and Development Expenses – Engineering and development expenses consist primarily of salaries and related personnel costs and other 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 June 30, 2003, there were no full time employees performing engineering or development on our products and services. Effective September 30, 2002, 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 June 30, 2003, there were no full time employees performing selling and marketing activities. Our remaining two employees are 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. Effective April 23, 2001, we implemented an approximate 40% reduction in our work force. Effective June 28, 2002, we implemented an approximate 50% reduction in our then existing work force and the remaining twenty (20) employees took a ten percent reduction in their salary. Effective July 29, 2002, we reduced our work force by approximately 35% to thirteen (13) persons. Effective September 30, 2002, we reduced our work force to three (3) persons. At June 30, 2003, we had two employees, each working in a general and administrative capacity.
Results of Operations – Three Months Ended June 30, 2003 and 2002
Revenues for the three months ended June 30, 2003 increased $14,062 or 12% to $131,321 from $117,259 for the comparable period in 2002. The increase in our revenues was attributable to a $3,981 increased in service revenue and a $10,081 increase in software license revenue over the two periods. Customers representing more than 10% of our revenues for the six-month period ended June 30, 2003 were FleetBoston and New York Life Insurance Company (“New York Life”), approximately 38% and 22%, respectively. In 2002, sales to FleetBoston, New York Life and Veritas Software Corporation (“Veritas”) represented approximately 32%, 17% and 14% of our revenues, respectively. No other customer accounted for more than 10% of our revenues for either period.
We recognized $62,657 from the sale of our Mangomind service and $53,030 from the sale of our fileTRUST service during the three months ended June 30, 2003. During the same period in 2002, we recognized $70,692 from the sale of our Mangomind service and $41,014 from the sale of our fileTRUST service.
Cost of services for the three months ended June 30, 2003 decreased $96,520 or 42% to $131,095 compared to $227,615 for the comparable period in 2002. The decrease in the cost of delivering our services was primarily a result of our decision to outsource the management of our billable services infrastructure and product and customer support to Built Right Networks, continued overhead reductions and a switch to a lower cost data center.
Engineering and development expense for the three-month period ended June 30, 2003 was $839. In the comparable period in 2002, engineering and development expense was $802,602, which consisted primarily of salaries and related personnel costs. During the three-month period ended June 30, 2003, we had no full-time employees performing engineering or development activities.
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For the three-month period ended June 30, 2003, other operating expenses including selling and marketing and general and administrative expenses decreased $911,552 or 76% to $283,160 compared with $1,194,712 for the comparable period in 2002. The decrease in other operating expenses was due primarily to our reduced spending in the areas of marketing and sales consultants, 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-month period ended June 30, 2003, each of our two (2) full-time employees were working in a general and administrative capacity.
Stock-based compensation expense of $258 was recorded for the three-month period ended June 30, 2003 compared to $174,349 for the comparable period in 2002. The decrease in this expense was primarily attributable to the decrease in the number of outstanding employee stock options subject to compensation expense as well as the decline in the market price of our common stock and its effect on employee stock options accounted for as variable awards (see note 3 to the condensed consolidated financial statements).
Our loss from operations decreased $1,997,988 to $284,031 for the three-month period ended June 30, 2003 compared with a loss from operations of $2,282,019 for the comparable period in 2002 as a result of the above factors.
Interest income increased $12,426 to $31,231 for the three months ended June 30, 2003 compared to $18,805 for the three months ended June 30, 2002. Our cash balances available for investment have decreased period over period, however we have invested approximately $1.1 million in several high-yield, secured corporate notes that deliver greater returns than our pervious interest-bearing cash accounts.
Results of Operations – Six Months Ended June 30, 2003 and 2002
Revenues for the six months ended June 30, 2003 increased $63,562 or 30% to $272,289 from $208,727 for the comparable period in 2002. The increase in our revenues was attributable to a $33,582 increased in service revenue and a $29,980 increase in software license revenue over the two periods. Customers representing more than 10% of our revenues for the six-month period ended June 30, 2003 were FleetBoston and New York Life, approximately 35% and 21%, respectively. In 2002, sales to FleetBoston, New York Life and Veritas represented approximately 28%, 20% and 15% of our revenues, respectively. No other customer accounted for more than 10% of our revenues for either period.
We recognized $130,882 from the sale of our Mangomind service and $104,374 from the sale of our fileTRUST service during the six months ended June 30, 2003. During the same period in 2002, we recognized $138,785 from the sale of our Mangomind service and $62,889 from the sale of our fileTRUST service. We began selling the fileTRUST services in March 2002.
Cost of services for the six months ended June 30, 2003 decreased $166,814 or 39% to $258,962 from $425,776 for the comparable period in 2002. The decrease in the cost of delivering our services was primarily a result of our decision to outsource the management of our billable services infrastructure and product and customer support to Built Right Networks, continued overhead reductions and a switch to a lower cost data center.
Engineering and development expense for the six-month period ended June 30, 2003 was $4,205. In the comparable period in 2002, engineering and development expense was $1,497,335, which consisted primarily of salaries and related personnel costs. During the six-month period ended June 30, 2003, we had no full-time employees performing engineering or development activities.
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For the six-month period ended June 30, 2003, other operating expenses including selling and marketing and general and administrative expenses decreased $1,938,360 or 77% to $584,693 compared with $2,523,053 for the comparable period in 2002. The decrease in other operating expenses was due primarily to our reduced spending in the areas of marketing and sales consultants, 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-month period ended June 30, 2003, each of our two (2) full-time employees were working in a general and administrative capacity.
We recorded $2,338 in stock-based compensation expense over the six-month period ended June 30, 2003 compared to $355,448 for the comparable period in 2002. The decrease in this expense was primarily attributable to the decrease in the number of outstanding employee stock options subject to compensation expense as well as the decline in the market price of our common stock and its effect on employee stock options accounted for as variable awards (see note 3 to the condensed consolidated financial statements).
Our loss from operations decreased $4,014,976 to $577,909 for the six-month period ended June 30, 2003 compared with a loss from operations of $4,592,885 for the comparable period in 2002 as a result of the above factors.
Interest income increased $9,785 to $57,022 for the six months ended June 30, 2003 compared to $47,237 for the six months ended June 30, 2002. Our cash balances available for investment have decreased period over period, however we have invested approximately $1.1 million in several high-yield, secured corporate notes that deliver greater returns than our pervious interest-bearing cash accounts.
Financial Condition, Liquidity and Capital Resources
We were formed in June 1995 and, since our formation, have raised approximately $74.2 million in gross proceeds as of June 30, 2003 through the private placement of debt and equity securities. In addition, 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, 2003, approximately $1.0 million in additional financing was provided through accounts payables, accrued expenses and other trade credit.
At June 30, 2003, we had a cash balance of approximately $164,000 and a working capital deficiency of approximately $151,000. At June 30, 2003, we had approximately $1.1 million invested in several high-yield short and long-term investments. Excluding our Nashua, NH facility lease, we do not have any commercial commitments or off balance sheet financing. Our facility lease is set to expire in November 2003.
As shown in the unaudited condensed consolidated financial statements, during the six months ended June 30, 2003 and 2002, we incurred net losses of $520,887 and $4,545,648, respectively. Cash used in operations during the six months ended June 30, 2003 and 2002 was $338,519 and $3,730,987, 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.
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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 $88,020,030 as of June 30, 2003. For the six months ended June 30, 2003 and the year ended December 31, 2002, our net losses were $520,887 and $6,384,402, respectively. 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 May 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. If we are unable to obtain the necessary financing, our business, operating results and financial condition will be materially and adversely affected.
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 High-Yield Investments Could Become Impaired.
We have approximately $1.1 million invested in high-yield, secured corporate notes. These investments represent a significant portion of our total assets at June 30, 2003. Investments in high-yield corporate notes entail a higher risk of delinquency or even complete loss. No assurance can be given that we will not experience any losses or that our debtors will timely remit on the maturity of these notes. If we experience any loss or impairment on these investments, our business, financial condition and results of operations will be materially and adversely affected.
We Have Limitations On The Effectiveness Of Our Internal Controls.
We have two full-time employees, each 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.
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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.
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.
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 and fileTRUST, both of which are in the initial marketing phase. If markets for our products fail to develop, develop more slowly than expected or are subject to substantial competition, 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.
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
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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.
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ITEM 3. CONTROLS AND PROCEDURES
We have significantly reduced our work force on several occasions during 2001 and 2002. At June 30, 2003, we had two (2) employees, including 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, financial reporting and 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. We continue to review our disclosure controls and procedures and the effectiveness of those controls.
Within the ninety (90) day period prior to the date of this report, we conducted an evaluation, under the supervision and participation of our Chief Executive Officer (principal financial and executive officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer (principal financial and executive officer) concluded that our disclosure controls and procedures are effective in timely alerting him to material information required to be included in our periodic SEC filings.
There were no significant changes in our internal controls or in other factors that could significantly affect our disclosure procedures subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or taken.
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On December 6, 2002, the Company filed a notification on Form 8-K that on November 22, 2002, it filed a complaint in the United States District Court, District of New Hampshire, against Oracle Corporation for infringement of U.S. Patent No. 6,148,377 and U.S. Patent No. 5,918,229.
On June 4, 2003, the Company filed a notification on Form 8-K that 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 17, 2003, the Company filed notification on Form 8-K that on July 2, 2003, it 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.
On March 7, 2003, the Company completed its 1-for-27 reverse stock split. As a result of this reverse stock split, the Company’s authorized shares of common stock decreased to 3,703,704, of which 1,013,038 were issued and outstanding
On July 14, 2003, the Company amended the Rights Agreement, dated as of March 14, 2003, between the Company and Interwest Transfer Co., Inc., as Rights Agent (the “Rights Agreement”), increasing the initial exercise price thereunder from $125.00 per Right (as defined in the Rights Agreement) to $250.00 per Right.
On July 23, 2003, the Company completed the private placement of 20,000 shares of Series B Convertible Preferred Stock (the “Preferred Stock”) to two significant shareholders, one of which was the Company’s former co-chairman of its Board of Directors. The Company received $50,000 in connection with this private placement. The Preferred Stock has no stated dividend rate. Each share of Preferred Stock is convertible into one share of common stock at the option of the holder. In addition to its convertible features, the holders of the Preferred Stock are entitled to twenty-five votes per share of Preferred Stock on any matter brought to the vote of shareholders.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
| (a) | Exhibits: |
| 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) | |
10 | Lease of Westborough Office Park, Building Five, dated November 10, 1995. (3) | |
16 | Letter on Change in Certifying Accountant. (4) | |
21 | Subsidiary of the Registrant. (2) | |
31.1 | Certification of Principal Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). | |
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 (filed herewith). | |
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. (5) | |
99.5 | Warrant Agreement, dated February 11, 2002, between MangoSoft, Inc. and Fleet National Bank. (5) | |
99.6 | Information Management Services Agreement, dated September 30, 2002, between MangoSoft, Inc. and Built Right Networks LLC. (6) | |
99.7 | Rights Agreement, dated March 14, 2003, between MangoSoft, Inc. and Interwest Transfer Co., Inc. (7) |
| (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 Current Report on Form 8-K for an event dated September 27, 2002 and hereby incorporated by reference thereto. |
| (5) | 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. |
| (6) | 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. |
| (7) | Files as an exhibit to our Current Report on Form 8-K for an event dated March 21, 2003 and hereby incorporated by reference thereto. |
| (b) | Reports on Form 8-K: |
On June 4, 2003, we files on Form 8-K notification that on May 15, 2003, Oracle International Corporation (“Oracle”) filed a complaint (the “Complaint”) in the United States District Court for the Northern District of California against us, Mangosoft Corporation and Built Right Networks LLC (collectively, including us, the “Defendants”). The Complaint alleges, among other things, that various
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software and/or systems manufactured, used and sold by the Defendants, including the Mangomind product and related services, infringe a patent held by Oracle. The Mangomind product and related services currently account for a significant portion of our revenues. The Complaint seeks unspecified monetary damages and injunctive relief and awards for interest, costs and attorneys’ fees.
As previously reported, on November 22, 2002, we filed a complaint in United States District Court for the District of New Hampshire against Oracle for infringement of two patents held by us.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| August 14, 2003 | MANGOSOFT, INC. | |||||
| By: | /s/ DALE VINCENT | |||||
| Dale Vincent Chief Executive Officer (Principal Financial and Accounting Officer) | ||||||
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