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 September 30, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from ____________ to ____________
Commission File Number: 33-93994
MANGOSOFT, INC.
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(Exact name of registrant as specified in its charter)
Nevada 87-0543565
------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer ID. No.)
incorporation or organization)
1500 West Park Drive, Suite 190
Westborough, MA 01581
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (508) 871-7397
First American Clock Co., 953 East South, Salt Lake City, Utah 84106
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(Former name and former address, if changed since last report)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes x No
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Common Stock 19,883,998 Shares
------------ -----------------
$.001 Par Value (Outstanding on November 19, 1999)
MANGOSOFT, INC. AND SUBSIDIARIES
(A Development Stage Company)
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Condensed Consolidated Statements of Operations for the three months ended September 30, 1999 and 1998....... 1
Condensed Consolidated Statements of Operations for the nine months ended September 30, 1999 and 1998........ 2
Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998......................... 3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998........ 4
Notes to Condensed Consolidated Financial Statements......................................................... 5
ITEM 2--Management's Discussion and Analysis of Financial Condition and Results of Operations................ 12
PART II. OTHER INFORMATION
ITEM 1--Legal Proceedings.................................................................................... 20
ITEM 2--Changes in Securities and Use of Proceeds............................................................ 20
ITEM 3--Defaults Upon Securities............................................................................. 20
ITEM 4--Submission of Matters to a Vote of Security Holders.................................................. 20
ITEM 5--Other Information.................................................................................... 21
ITEM 6--Exhibits and Reports on Form 8-K..................................................................... 21
Signatures................................................................................................... 22
i
PART I. FINANCIAL INFORMATION
MANGOSOFT, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended September 30,
--------------------------------
1999 1998
----------- -----------
Revenues .................................... $ 27,775 $ 1,138
Costs and expenses:
Cost of revenues .......................... -- 4,486
Research and development .................. 1,280,537 1,618,116
Selling and marketing ..................... 155,326 243,134
General and administrative ................ 438,293 905,586
----------- -----------
Loss from operations ........................ (1,846,381) (2,770,184)
Interest income ............................. 625 16,311
Other expenses:
Interest expense to related parties ....... (116,186) --
Other interest expense .................... (4,865) (22,238)
----------- -----------
Total other expenses .............. (121,051) (22,238)
----------- -----------
Net loss .................................... (1,966,807) (2,776,111)
Dividends accrued on preferred stock ........ 471,231 658,422
----------- -----------
Net loss applicable to common shares ........ $(2,438,038) $(3,434,533)
=========== ===========
Net loss per common share ................... $ (0.32) $ (2.18)
=========== ===========
Shares used in computing net loss per
Common share ................................ 7,678,000 1,575,000
=========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
MANGOSOFT, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Nine Months Ended September 30,
------------------------------- Cumulative Since
1999 1998 Inception
---- ---- ---------
Revenues ................................... $ 35,678 $ 308,260 $ 343,938
Costs and expenses:
Cost of revenues ......................... 275 91,529 91,804
Research and development ................. 3,385,874 5,241,567 21,950,442
Selling and marketing .................... 198,509 2,586,971 9,285,179
General and administrative ............... 1,513,025 2,433,533 10,016,,733
Consulting fee to related parties ........ -- 350,000 647,795
----------- ------------ ------------
Loss from operations ....................... (5,062,005) (10,395,340) (41,648,015)
Interest income ............................ 3,896 163,478 568,972
Other expenses:
Interest expense to related parties ...... (359,128) -- (378,854)
Other interest expense ................... (4,865) (30,175) (54,372)
----------- ------------ ------------
Total other expenses ............. (363,993) (30,175) (433,226)
----------- ------------ ------------
Net loss ................................... (5,422,102) (10,262,037) (41,512,269)
Dividends accrued on preferred stock ....... 1,884,923 1,976,063 6,604,024
----------- ------------ ------------
Net loss applicable to common shares ....... $(7,307,025) $(12,238,100) $(48,116,293)
=========== ============ ============
Net loss per common share .................. $ (2.02) $ (7.77)
=========== ============
Shares used in computing net loss per
Common share ............................ 3,609,333 1,575,000
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
MANGOSOFT, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 2,319,040 $ 232,637
Accounts receivable .................................. 15,821 9,458
Inventory ............................................ -- 275
Prepaid insurance .................................... 173,475 --
Other current assets ................................. 4,650 3,591
------------ ------------
Total current assets ............................ 2,512,986 245,961
PROPERTY AND EQUIPMENT--Net ............................... 188,678 206,264
DEPOSITS AND OTHER ASSETS ................................. 59,320 5,943
------------ ------------
TOTAL ................................................ $ 2,760,984 $ 458,168
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt ...................................... $ 157,265 $ 750,000
Short-term debt to related parties ................... -- 2,000,000
Accrued expenses to related parties .................. 747,795 647,795
Accounts payable ..................................... 1,851,779 1,768,456
Accrued payroll ...................................... 287,584 142,834
Accrued merger costs ................................. 300,000 --
Other accrued expenses ............................... 394,086 424,172
Deferred revenue ..................................... 11,401 19,160
------------ ------------
Total current liabilities ....................... 3,749,910 5,752,417
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK:
Redeemable convertible preferred stock, Series C ..... -- 10,536,748
Redeemable convertible preferred stock, Series D ..... -- 7,193,384
Redeemable convertible preferred stock, Series E ..... -- 14,233,546
------------ ------------
Total redeemable preferred stock ................ -- 31,963,678
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Convertible preferred stock, Series A ................ -- 22,500
Convertible preferred stock, Series B ................ -- 7,500
Common stock ......................................... 19,884 761
Additional paid-in capital ........................... 43,586,903 --
Deficit accumulated during development stage ......... (44,595,713) (37,288,688)
------------ ------------
Total stockholders' equity (deficiency) ......... (988,926) (37,257,927)
------------ ------------
TOTAL ..................................................... $ 2,760,984 $ 458,168
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
MANGOSOFT, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Months Ended September 30, Cumulative Since
1999 1998 Inception
---- ---- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (5,422,102) $(10,262,037) $(41,512,269)
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization ........................................ 82,662 499,010 2,018,476
Stock-based compensation ............................................. 349,963 -- 467,409
Loss on disposal of equipment ......................................... -- -- 71,942
Change in assets and liabilities:
Accounts receivable ............................................... (6,363) 140,063 (15,821)
Inventory ......................................................... 275 62,358 --
Prepaid insurance and other current assets ........................ (17,269) 68,280 (20,860)
Deposits and other assets ......................................... (53,377) 172,172 (59,320)
Accrued expenses to related parties ............................... -- 350,000 647,795
Accounts payable .................................................. 83,323 (802,379) 1,851,779
Accrued payroll ................................................... 144,750 76,952 287,584
Other accrued expenses ............................................ (2,640) 43,023 394,086
Deferred revenue .................................................. (7,759) (130,361) 11,401
------------ ------------ ------------
Total adjustments .......................................... 573,565 479,118 (5,654,471)
------------ ------------ ------------
Net cash used in operating activities ...................... (4,848,537) (9,782,919) (35,857,798)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment .............................. (65,076) (158,216) (2,291,845)
Net cash acquired in merger .......................................... 16 -- 16
Proceeds from sale of fixed assets ................................... -- 12,749
------------ ------------ ------------
Net cash used in investing activities ...................... (65,060) (158,216) (2,279,080)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term debt .................... (750,000) 750,000 --
Proceeds from issuance of short-term-debt to related parties ......... 4,000,000 -- 6,000,000
Issuance of common stock in connection with merger ................... 3,750,000 -- 3,750,000
Net proceeds from sale of redeemable convertible Preferred stock ..... -- 203,837 27,244,577
Net proceeds from sale of convertible preferred stock ................ -- -- 3,460,591
Net proceeds from sale of common stock ............................... -- -- 750
------------ ------------ ------------
Net cash provided from financing activities ................ 7,000,000 953,837 40,455,918
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ........................... 2,086,403 (8,987,298) 2,319,040
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............................ 232,637 9,366,392 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................. $ 2,319,040 $ 379,094 $ 2,319,040
============ ============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
MANGOSOFT, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
MangoSoft, Inc. and subsidiaries (a development stage company) ("the
Company") develops and markets advanced software technology to simplify,
expand and integrate networking and pooled use of computer resources. It is
engaged in a single operating segment of the computer software industry.
The Company is considered to be a development stage company since it
has not generated significant revenues from products that have been
developed to date. The Company is subject to a number of risks similar to
those of other companies in an early stage of development. Principal among
these risks are dependencies on key individuals, competition from other
substitute products and larger companies, the successful development and
marketing of its products and the need to obtain adequate additional
financing necessary to fund future operations.
The Company, without audit, has prepared the accompanying condensed
consolidated financial statements. In the opinion of management, these
unaudited interim condensed consolidated financial statements furnished
herein reflect all adjustments, which in the opinion of management are of a
normal recurring nature, necessary to fairly state MangoSoft, Inc. and
subsidiaries' financial position, cash flows and the results of operations
for the periods presented and have been prepared on a basis substantially
consistent with the audited financial statements as at December 31, 1998.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. Accordingly, these unaudited
interim condensed consolidated financial statements should be read in
conjunction with the Company's Form 8-K.
The results of operations for the interim periods are not necessarily
indicative of the results of operations to be expected for the fiscal year.
2. MERGER TRANSACTION AND BASIS OF PRESENTATION
On September 7, 1999, MangoMerger Corp. ("MangoMerger"), a wholly-owned
subsidiary of First American Clock Co. ("First American"), merged (the
"Merger") with and into MangoSoft Corporation ("MangoSoft"), pursuant to
an Agreement and Plan of Merger (the "Merger Agreement") dated August 27,
1999. Following the Merger, the business to be conducted by First American
was the business conducted by MangoSoft prior to the Merger. In conjunction
with the Merger, First American changed its name to MangoSoft, Inc.
("MangoSoft, Inc."), which is the legal acquirer and surviving legal
entity.
Pursuant to the Merger Agreement, MangoSoft, Inc. issued 6,008,998
shares of its authorized but unissued common stock to the former MangoSoft
common and preferred stockholders. In addition, substantially all
outstanding options and warrants to purchase MangoSoft common stock were
terminated and new options and warrants to purchase MangoSoft, Inc. common
stock were issued in their place. Furthermore, promissory notes in the
aggregate of $6,377,409 (including principal and accrued interest) held by
creditors of MangoSoft were converted into an aggregate of 9,000,000 shares
of MangoSoft, Inc. common stock.
At the time of the Merger, the common shares issued to the former
MangoSoft stockholders represented approximately 55.21% of the outstanding
MangoSoft, Inc. common stock, enabling the former MangoSoft stockholders to
retain voting and operating control of the Company. The merger transaction
has been accounted for under the purchase method of accounting and was
treated as a reverse acquisition as the shareholders of MangoSoft received
the larger portion of the voting interests in the combined enterprise.
Therefore, for accounting purposes, MangoSoft is deemed to have acquired
MangoSoft, Inc. Accordingly, the assets and
5
liabilities of MangoSoft, Inc. were adjusted to reflect their fair market
values at the Merger date. Estimated merger costs of $.3 million have been
accrued at September 30, 1999.
Since the accounting applied differs from the legal form of the merger,
the 1998 financial information presented herein represents only the
financial results of MangoSoft. The 1999 financial information presented in
the Condensed Consolidated Statements of Operations and the Condensed
Consolidated Statements of Cash Flows represents the results of MangoSoft
for the periods stated and includes the financial results of MangoSoft,
Inc. for only the post-merger period ended September 30, 1999. The
Condensed Consolidated Balance Sheet as of September 30, 1999 represents
the combined balance sheet of the merged entity at that date while the
Condensed Consolidated Balance Sheet as of December 31, 1998 represents
MangoSoft only.
Pro Forma Disclosure - The following table represents the unaudited pro
forma results of operations for the nine months ended September 30, 1999
and 1998 assuming the Merger had occurred on December 31, 1997, the
beginning of the earliest period presented in the accompanying condensed
consolidated financial statements. These pro forma results have been
prepared for comparative purposes only and are not necessarily indicative
of what would have occurred had the Merger occurred at that date or of
results which may occur in the future.
Nine Months Ended
September 30,
-------------
1999 1998
---- ----
Revenue $ 35,678 $ 308,260
Loss from operations (5,062,543) (10,398,980)
Net loss (5,063,512) (10,265,677)
Net loss applicable to common shares (5,063,512) (10,265,677)
----------- ------------
Net loss per common share $ (0.31) $ (1.35)
=========== ============
Shares used in computing net loss per common
Share 16,550,665 7,610,219
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - As described in Note 2, MangoSoft, Inc.
completed a merger transaction on September 7, 1999 that has been
accounted for as a reverse acquisition. Accordingly, the Company's
consolidated financial statements for periods prior to September 7, 1999
represent those of its subsidiary, MangoSoft Corporation, which is
considered to be the acquirer for accounting purposes. The consolidated
financial statements for periods subsequent to September 7, 1999 include
the accounts of MangoSoft, Inc. and its wholly owned subsidiaries after
the elimination of all significant intercompany balances.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the balance sheet dates. Estimates include such items as
reserves for estimated product returns and allowances, useful lives of
other assets, property and equipment, and accrued liabilities. Actual
results could differ from those estimates.
Revenue Recognition - Revenue is recognized when earned. The Company
sells its products primarily through distributors. Revenue from
off-the-shelf product sales is recognized upon resale by the distributors.
Revenue from products licensed to original equipment manufacturers ("OEMs")
is recognized when OEMs ship licensed products. Provisions are recorded for
estimated product returns and allowances. Of the total products shipped by
the Company, $11,401 was not resold by the distributors at September 30,
1999.
Cash and Equivalents - Cash and equivalents include cash on hand, cash
deposited with banks and highly liquid debt securities with remaining
maturities of ninety days or less when purchased.
Inventory - Inventory is stated at a lower of cost or market using the
first-in, first-out method. Inventory consists of costs associated and
packaging of software
6
Property and Equipment - Property and equipment are recorded at cost.
Depreciation and amortization are provided using the straight-line method
over the estimated useful lives (one to five years) of the related assets.
Software Development Costs - Costs incurred prior to technological
feasibility of the Company's software products are expensed as research and
development costs. Certain costs incurred after technological feasibility
has been established are capitalized. In 1999 and 1998, no such costs were
capitalized.
Income Taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes." This Statement requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the Company's consolidated financial statements or tax returns.
Deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of existing
assets and liabilities, using enacted tax rates in effect in the year(s) in
which the differences are expected to reverse.
Stock-Based Compensation - As permitted by SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company accounts for stock-based
compensation using the intrinsic value method in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees."
Net Loss Per Common Share - The Company calculates basic and diluted
earnings (loss) per share in accordance with SFAS No. 128, "Earnings Per
Share". Basic earnings per common share is computed by dividing net
earnings available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per common
share includes the weighted average number of common shares outstanding and
gives effect to potentially dilutive common shares such as options,
warrants and convertible debt and preferred stock outstanding.
Although MangoSoft, Inc. is the surviving legal entity after the
Merger, for accounting purposes the Merger is treated as a reverse
acquisition of MangoSoft, Inc. by MangoSoft. Therefore, only the historical
net loss of MangoSoft is included in the condensed consolidated financial
statements of the Company for all periods prior to the merger. However, for
purposes of computing earnings per share, the weighted average number of
outstanding shares and potentially dilutive securities of MangoSoft, Inc.
is used for periods prior to the Merger.
Net loss per common share for the three and nine months ended September
30, 1999 and 1998 is based only on the weighted average number of shares
of common stock outstanding. Basic and diluted loss per common share are
the same for all periods presented as potentially dilutive securities,
including options, warrants, convertible notes and preferred stock have not
been included in the calculation of the net loss per common share as their
effect is antidilutive.
Comprehensive Income - Comprehensive income (loss) is equal to net
income (loss) for the three and nine months ended September 30, 1999 and
1998.
Future Adoption of Accounting Pronouncements - In June 1998, the
Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. The provisions of SFAS No. 133 are effective for periods
beginning after June 15, 2000. The Company is currently evaluating the
effect SFAS No. 133 will have on the Company's financial position and
results of operations. The Company will adopt this accounting standard on
January 1, 2001, as required.
7
Nine Months Ended
September 30, Cumulative
------------------------ Since
1999 1998 Inception
---- ---- ----------
Supplemental Cash Flow Information
Cash paid during the period for interest ........................ $ 11,102 $ 25,487 $ 80,335
Non Cash Financing Activities
Merger-related transactions:
Conversion of redeemable convertible preferred stock to
Common stock .......................................... $33,848,617 $ -- $33,848,617
Conversion of convertible preferred stock to common
Stock ................................................. 30,000 -- 30,000
Conversion of 12% convertible notes to common stock ......... 6,000,000 -- 6,000,000
Stock-based compensation .................................... 349,963 -- 467,409
Conversion of related party accrued interest to
common stock .......................................... 27,462 -- --
Purchase of treasury stock .................................. 100,000 -- 100,000
Accrued merger costs ........................................ 300,000 -- 300,000
Merger costs paid for with common stock ..................... 500,000 -- 500,000
Issuance of note to finance prepaid insurance .................... 157,265 -- 157,265
Accretion of redeemable convertible preferred stock .............. 1,884,923 1,976,063 6,604,024
Conversion of accounts payable to common stock ................... -- 90,000 --
4. FUNDING OF OPERATIONS
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements during the nine months ended September 30, 1999
and 1998, and cumulative since inception, the Company incurred net losses
of $5,422,102, $10,262,037 and $41,512,269, respectively, and at September
30, 1999, a substantial portion of it's accounts payable were past due.
These factors, among others, raise substantial doubt about the Company's
ability to continue as a going concern. Based upon the Company's present
financial position, management believes that the Company has sufficient
capital to fund operations through January 2000.
The financial statements do not include any adjustments relating to the
recoverability 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 to meet its obligations on a timely basis, to comply
with the terms of its financing agreements, to obtain additional financing,
and ultimately to attain profitability. During 1999, management expects to
continue to reduce operating expenses, consolidate operations, and seek
additional equity and debt financing. Management expects to further develop
markets for the Company's product by establishing license and contractual
agreements with OEMs (Original Equipment Manufacturers).
5. SHORT-TERM DEBT
Short-term debt consisted of the following at:
September 30, December 31,
1999 1998
---- ----
Notes payable to insurance company..... $ 157,265 $ --
Equipment term loan due to bank........ -- 750,000
Notes payable to related parties....... -- 2,000,000
--------- -----------
Total............................ $ 157,265 $ 2,750,000
========= ===========
On May 28, 1998, the Company entered into a $1,250,000 financing
agreement with a bank. The financing consisted of a $750,000 equipment term
loan and a $500,000 revolving loan. Advances against the revolving
8
loan were based on a percentage of eligible accounts receivable. Interest
was charged at the bank's prime rate plus 1/2%. Borrowings outstanding were
collateralized by substantially all of the Company's assets. The financing
agreement contained financial and non-financial covenants including a
prohibition for further indebtedness, and the Company was not in compliance
with its financial covenants as of December 31, 1998. In connection with
the February 1999 issuance of 12% Secondary Secured Convertible Notes (the
"Notes") by the Company, the $750,000 in borrowings, plus accrued interest,
was paid in full and the financing agreement was terminated.
In October 1998, the Company entered into financing agreements with two
stockholders to provide $2,000,000 of financing through the issuance of
demand notes. Unpaid amounts under the notes bear interest at 8%. The
amounts outstanding under these financing agreements were converted into
the Notes in February 1999.
The Company issued $4,000,000 in Notes in February 1999, including
$2,000,000 from conversion of the demand notes payable to the two
stockholders. An additional $2,000,000 in Notes were issued during the
year. Subject to a 365-day extension at the option of the Company under
certain conditions, the Notes were due 182 days from their issue date. The
Notes were secured by substantially all of the Company's assets and were
convertible into common stock under several options. A portion of the
proceeds received on the issuance of the Notes was used to repay the
amounts owing under the term loan. The $6,000,000 in Notes plus the related
accrued interest was converted into MangoSoft, Inc. common stock in
connection with the merger transaction described in Note 2.
In September 1999, the Company executed a note payable to an insurance
company to finance the payment of its Directors and Officers Liability
Insurance premium. The note carries interest at 8.5% per annum and is due
in nine monthly installments, with a final maturity on June 3, 2000.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
MangoSoft Corporation
At December 31, 1998, MangoSoft had 1,500,000 authorized, issued
and outstanding shares of Series C Redeemable Convertible Preferred Stock,
$.01 par value (the "Series C Preferred Stock") with a liquidation
preference of $9 million; 1,000,000 authorized, 799,751 issued and
outstanding shares of Series D Convertible Preferred Stock, $.01 par value
(the "Series D Preferred Stock") with a liquidation preference of $8
million; and 1,450,000 authorized, issued and outstanding shares of Series
E Convertible Preferred Stock, $.01 par value (the "Series E Preferred
Stock") with a liquidation preference of $13.05 million (collectively, the
"Redeemable Preferred Stock").
Holders of the Redeemable Preferred Stock have the right and option to
convert the preferred shares, at any time, into shares of common stock.
Each share of Redeemable Preferred Stock will initially convert into one
share of common stock, subject to adjustments for stock splits,
combinations, stock dividends and distributions. The Redeemable Preferred
Stock has voting rights equal to the number of shares of common stock into
which it is convertible. Under certain events, including a public offering
of the common stock or approval by a certain percentage of each class of
the holders, the Redeemable Preferred Stock will automatically convert
into common stock.
In addition, the holders of the redeemable preferred stock are entitled
to receive preference to the holders of the common stock in the event of
liquidation. On June 15, 2001, MangoSoft may be required, at the option of
the holders of a majority of the then outstanding Series C, Series D and
Series E Preferred Stock, to redeem 33 1/3% of the outstanding shares of
the Series C, Series D and Series E Preferred Stock, and 50% and 100% of
all outstanding shares on the first and second anniversaries from June 15,
2001, respectively.
In connection with the merger transaction in September 1999, as
described in Note 2, all shares of MangoSoft Redeemable Preferred Stock
were converted into common stock of MangoSoft, Inc.
9
7. STOCKHOLDERS' EQUITY (DEFICIENCY)
MangoSoft, Inc.
Common stock - At September 30, 1999, the Company had authorized
100,000,000 shares of $.001 common stock, of which 19,883,998 shares were
issued and outstanding, and 3,500,000 shares are reserved for issuance
pursuant to the Company's 1999 Incentive Compensation Plan.
Stock Options - In connection with the Merger, the Company adopted the
1999 Incentive Compensation Plan. The Plan, as amended, provides for the
issuance of up to 3,500,000 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. The exercise price of the option is not less than the fair market
value at the date of grant.
The following table sets forth information regarding the options
outstanding at September 30, 1999:
Average Average Number Price of
Exercise Number of Exercise Remaining Currently Currently
Price Shares Price Life Exercisable Exercisable
----- ------ ----- ---- ----------- -----------
$1.25 2,982,832 $1.25 10 Years 2,492,695 $1.25
Pro Forma Disclosure - As discussed in Note 3, the Company uses the
intrinsic value method to measure compensation expense associated with
grants of stock options. Had the Company used the fair value method of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," to measure compensation, the reported net loss
for the nine months ended September 30, 1999 would have been $5,776,504.
For purposes of calculating the pro forma effects on net loss, the fair
value of options on their grant date was measured using the Black-Scholes
Model with a risk-free interest rate of 6.0%, an expected option life of
two years, no dividends and a volatility of 5%. Options granted during the
nine months ended September 30, 1999 had a weighted average grant date fair
value of $0.14.
MangoSoft Corporation
Convertible Preferred Stock - At December 31, 1998, the MangoSoft had
2,250,000 authorized, issued and outstanding shares of Series A Convertible
Preferred Stock, $.01 par value (the "Series A Preferred Stock") and
750,002 authorized, issued and outstanding shares of Series B Convertible
Preferred Stock, $.01 par value (the "Series B Preferred Stock")
(collectively, the "Convertible Preferred Stock").
Holders of the Convertible Preferred Stock have the right and option to
convert the preferred shares, at any time, into shares of common stock.
Each share of Convertible Preferred Stock will initially convert into one
share of common stock. The conversion rate will be adjusted for stock
splits, combinations, stock dividends and distributions. The Convertible
Preferred Stock has voting rights equal to the number of shares of common
stock into which it is convertible, and a preference over the holders of
the common stock in the event of liquidation. In the event of a public
offering of the common stock or upon written notice of at least 51% of all
the then outstanding shares, the Series A Preferred Stock and Series B
Preferred Stock will automatically convert into common stock at the
applicable conversion rate.
Common Stock - At December 31, 1998, MangoSoft had authorized
25,000,000 shares of $.001 par value common stock (the "common stock"), of
which 761,250 shares were issued and outstanding; 2,250,000 shares are
reserved for issuance upon conversion of the Series A Preferred Stock;
750,002 shares are reserved for issuance upon conversion of the Series B
Preferred Stock; 1,500,000 shares are reserved for issuance upon conversion
of the Series C Preferred Stock; 799,751 shares are reserved for issuance
upon conversion of the Series D Preferred Stock; 1,450,000 shares are
reserved for issuance upon conversion of the Series E Preferred
10
Stock; 180,000 shares are reserved for issuance upon exercise of
outstanding common stock warrants; and 2,000,000 shares are reserved for
issuance pursuant to the Company's 1995 Stock Plan.
In connection with the merger in September 1999, as described in Note
2, all shares of MangoSoft common stock and Convertible Preferred Stock
were converted into common stock of MangoSoft, Inc. In addition,
substantially all outstanding options and warrants to purchase MangoSoft
common stock were terminated and new options to purchase MangoSoft, Inc.
common stock were issued in their place.
8. COMMITMENTS AND CONTINGENCIES
The Company has a cancelable operating lease for office space, which
expires in 2001. The Company also leases various office equipment under
operating leases. Total rent expense was approximately $ 413,488 and
$509,820 for the nine months ended September 30, 1999 and 1998,
respectively. Future minimum rental payments under the cancelable operating
lease are $252,000 for the year ending December 31, 1999.
On August 30, 1999, one of the Company's shareholders filed suit in
Orange County (CA) Superior Court alleging damages for fraud in the sale of
securities under both Federal and California State law, and seeking a
rescission of the purchase agreement. The shareholder seeks damages in the
amount of $50,000, plus interest. On October 22, 1999, the matter was
removed to Federal Court following a petition by the Company. The Company
has answered the complaint, denied all material allegations and asserted
various affirmative defenses. Discovery has not commenced. In the judgement
of management, this litigation will not have a material adverse effect on
the Company's business and results of operations, although there can be no
assurance as to the ultimate outcome of this matter.
9. TRANSACTIONS WITH STOCKHOLDERS
Notes Payable - As discussed in Note 5, the Company received $2,000,000
of financing in 1998 from two stockholders. The demand notes, including
accrued interest thereon, were converted into 12% Secondary Secured
Convertible Notes (the "Notes") in February 1999. In connection with the
Merger, the Notes, including accrued interest, were converted into
MangoSoft, Inc. common stock.
Administrative Services - During 1998, a stockholder provided
administrative assistance to the Company. Amounts expensed and accrued for
such services approximated $647,795 and are included as an accrued expense
in the accompanying balance sheets.
Repurchase of Common Stock - In connection with the Merger, MangoSoft
agreed to repurchase 200,000 shares of common stock from one of its
stockholders for $100,000. The shares of common stock have been reacquired
and the amount owed of $100,000 has been reflected as an accrued liability.
10. GEOGRAPHIC SALES INFORMATION AND MAJOR CUSTOMERS
The Company's sales by geographic area were approximately 88% in Japan
and 12% in North America in both the nine months ended September 30, 1999
and 1998. One customer accounted for 88% of the 1999 sales and another
customer accounted for approximately 88% of the sales in 1998.
11
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The discussion below assumes that the Company can continue to do
business on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business. As shown in the financial statements, during the nine month ended
September 30, 1999 and 1998, and cumulative since inception, the Company
incurred net losses of $5,422,102, $10,262,037 and $41,512,269,
respectively, and at September 30, 1999, a substantial portion of it's
accounts payable were past due. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going
concern.
In addition, the financial statements do not include any adjustments
relating to the recoverability 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 to meet its obligations on a timely basis,
to comply with the terms of its financing agreements, to obtain additional
financing, and ultimately to attain profitability. During the remainder of
1999, management expects to continue to reduce operating expenses,
consolidate operations, and seek additional equity and debt financing.
Management also seeks to further develop markets for the Company's product
by establishing license and contractual agreements with OEMs (Original
Equipment Manufacturers).
On September 7, 1999, MangoMerger, a wholly-owned subsidiary of
First American, merged (the "Merger") with and into MangoSoft, pursuant to
an Agreement and Plan of Merger (the "Merger Agreement"), dated August 27,
1999. Following the Merger the business to be conducted by First American
was the business conducted by MangoSoft prior to the Merger. In
conjunction with the Merger, First American changed its name to MangoSoft,
Inc. ("MangoSoft, Inc."), which is the legal acquirer and surviving legal
entity. As a result of the Merger, the Company's Common Stock is included
for trading on the Over-the-Counter Electronic Bulletin Board (the
"OTCBB"). The Company does not intend to maintain its listing on the OTCBB,
which would require it to register its Common Stock under Federal
Securities laws by mid-December 1999. See "-- Risk Factors-Expected
Delisting."
The accounting applied in the Merger differs from the legal form.
Accordingly, the Company's consolidated financial statements for periods
prior to September 7, 1999, represent only the operating results and
financial position of its operating subsidiary, MangoSoft. The consolidated
financial statements for periods subsequent to September 7, 1999, reflect
the combined operating results and financial position of MangoSoft, Inc.
and MangoSoft. See Note 2 to the Unaudited Condensed Consolidated
Financial Statements.
The Company develops and markets advanced software technology to
simplify, expand and integrate networking and pooled use of computer
resources. The Company is considered to be a development stage company
since it has not generated significant revenues from the products that have
been developed-to-date. The Company is subject to a number of risks similar
to those of other companies in an early stage of development. Principal
among these risks are dependencies on key individuals, competition from
other substitute products and larger companies, the successful development
and marketing of its products and the need to obtain adequate additional
financing necessary to fund future operations. See "-Risk Factors."
12
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains trend analysis and other forward-looking
statements. Actual results could differ materially from those set forth in
the forward-looking statements as a result of factors set forth elsewhere
herein, including under "--Risk Factors." This discussion should be
read in conjunction with the accompanying condensed consolidated financial
statements for the periods specified and the associated notes. Further
reference should be made to the Company's Form 8-K filed with the
Securities and Exchange Commission in September 1999.
Results of Operations - Three Months Ended September 30, 1999 and 1998
Revenue increased to $27,775 in 1999 from $1,138 in 1998 due to
increased sales and marketing efforts. Revenue in the same period last year
suffered due to a product recall in the summer of 1998, and management's
decision to defer sales and marketing efforts until the product was
improved.
Cost of revenues decreased to $0 from $4,486 as the Company's
software products in 1999 were delivered via e-mail over the Internet.
Accordingly, the Company incurred no disk replication costs.
Operating expenses decreased 32.2% to $1,874,156 from $ 2,766,836 due
to the corporate reorganization discussed in Liquidity and Capital
Resources. The reorganization included changing the sales distribution
channel from a retail approach to value added resellers, consolidating
corporate functions and reducing total personnel.
A summary of the expense reductions is as follows:
Three Months Ended September 30, Increase (Decrease)
-------------------------------- -------------------
1999 1998 $ Amount %
---- ---- -------- ---
Research and development $1,280,537 $1,618,116 $(337,579) (20.9)
Selling and marketing 155,326 243,134 (87,808) (36.1)
General and administrative 438,293 905,586 (467,293) (51.6)
---------- ---------- --------- -----
Total $1,874,156 $2,766,836 $(892,680) (32.2)
========== ========== ========= =====
The loss from operations decreased 33.3% due primarily to the corporate
restructuring in the fourth quarter of 1998 and resulting lower operating
costs.
Interest expense increased due to the issuance of $6 million in the 12%
Secondary Secured Convertible Notes in February 1999, offset by savings
from repayment of the bank debt.
The net loss decreased 29.1% to $1,966,807 from $2,776,111 due to the
lower operating costs, offset by higher interest expense.
Results of Operations - Nine Months Ended September 30, 1999 and 1998
Revenue decreased from $308,260 in the nine months ended September 30,
1998 to $35,678 in the nine months ended September 30, 1999, due to the
Company's decision to defer sales and marketing efforts in the latter half
of 1998 and early 1999, and focus on improving the product. A single
customer, Hitachi, Ltd., represented 88% of the 1999 revenue, while
another customer, Nippon Telephone & Telegraph, represented approximately
88% of the 1998 revenue.
Cost of revenues decreased to $275 from $91,529 due to the lower level
of revenue. In addition, the 1999 products sold were delivered via e-mail
over the Internet and the Company incurred no disk replication costs.
Operating expenses decreased 52.0% to $5,097,408 from $10,612,071 due
to the corporate reorganization discussed in "--Liquidity and Capital
Resources." The reorganization included changing the sales distribution
channel from a retail approach to value added resellers, consolidating
corporate functions and reducing total personnel.
13
A summary of the expense reductions is as follows:
Nine Months Ended September 30, Increase (Decrease)
------------------------------- -------------------
1999 1998 $ Amount %
---- ---- -------- ---
Research and development $3,385,874 $ 5,241,567 $(1,855,693) (35.4)
Selling and marketing 198,509 2,586,971 (2,388,462) (92.3)
General and administrative 1,513,025 2,783,533 (1,270,508) (45.6)
---------- ----------- ----------- -----
Total $5,097,408 $10,612,071 $(5,514,663) (52.0)
========== =========== =========== =====
The loss from operations decreased 51.3% due primarily to the corporate
restructuring in the fourth quarter of 1998 and resulting lower operating
costs.
Interest expense increased due to the issuance of $6 million in the 12%
Convertible Notes in February 1999, offset by savings from repayment of the
bank debt. Interest income decreased due to the use of the proceeds from
issuance of the Series E Preferred Stock in 1998.
The net loss decreased 47.1% to $5,422,102 from $10,262,037 due to the
lower operating costs and interest income, offset by higher interest
expense.
Liquidity and Capital Resources
MangoSoft was formed in June 1995. Through August 1999, MangoSoft
has raised approximately $38 million in financing from the placement of
private debt and equity securities, as follows:
Date Description $ Millions
---- ----------- ----------
August 1995 Convertible preferred stock, Series A $ 1.5
December 1995 Convertible preferred stock, Series B 2.0
June 1996 Redeemable convertible preferred stock, Series C 9.0
April 1997 Redeemable convertible preferred stock, Series D 6.4
February 1998 Redeemable convertible preferred stock, Series E 13.1
February 1999 12% Secondary Secured Convertible Notes 6.0
-----
Total $38.0
=====
In addition to the above, MangoSoft has, at times, depended upon bank
debt and loans from stockholders and Directors to meet interim financing
needs. Bank debt of $750,000, incurred to purchase capital equipment,
was repaid using proceeds received from issuance of the 12% Secondary
Secured Convertible Notes (the "12% Notes"). Borrowing from stockholders
and directors has generally been refinanced with new debt instruments or
converted to additional equity. At September 30, 1999, an additional $3.6
million in financing was provided through accounts payable, accrued
expenses and other trade credit, a significant portion of which was past
due.
The proceeds raised from these financings have been used in the
development of the Company's current products with approximately $22
million invested in research and development. An additional $9 million was
spent on sales and marketing, principally due to an earlier attempt to
distribute products through traditional retail software channels. This
strategy subsequently was discontinued due to the resellers' inability to
deliver complete peer to peer network installation to end customers. The
remaining $11 million in proceeds have been used for working capital and
general corporate purposes.
To date, product sales have provided a minor source of revenues. From
inception through September 30, 1999, MangoSoft generated $.4 million in
sales and incurred cumulative net losses of $41.5 million, including losses
of $5.4 million and $10.3 million for the nine months ended September 30,
1999 and 1998, respectively. In the fourth quarter of 1998, MangoSoft
significantly modified its operations in an effort to reduce its operating
14
costs and net losses. The modifications included changing the sales
distribution channel from a retail approach to value added resellers,
consolidating corporate functions and reducing total personnel.
At September 30, 1999, the Company had a cash balance of $2.3 million
due to a $3.75 million sale of MangoSoft, Inc. common stock just prior to
the merger. The Company had working capital deficits of $1.2 million at
September 30, 1999 and $5.5 million at December 31, 1998. The working
capital deficit at December 31, 1998 included $2 million in stockholder and
director loans and $.7 million in other financing from related parties. The
$2 million in loans were converted into a like amount of the 12% Notes in
February 1999. The 12% Notes, including accrued interest of $377,409, were
subsequently converted into MangoSoft, Inc. common stock in connection with
the merger.
The Company will require additional financing to continue operations
beyond mid-January 2000. Although the Company has been successful in
raising past financing, there can be no assurance that any additional
financing will be available to the Company on commercially reasonable
terms, or at all. Any inability to obtain additional financing when needed
will have a material adverse effect on the Company, requiring the Company
to significantly curtail or possibly cease its operations. In addition, any
additional equity financing may involve substantial dilution to the
interests of the Company's then existing shareholders.
Plan of Operation - Next 12 Months
During the period immediately preceding the Merger, the Company reached
agreements with creditors representing approximately $2.0 million in older
trade payables and accrued expenses, and with the related parties owed $.7
million. Terms of these agreements range from six (6) to eighteen (18)
months and some include a reduction of the obligation. These renegotiations
will allow the Company to continue operations through December 1999 with
its existing cash of $2.3 million. The Company will require additional
financing to continue operations beyond mid-January 2000 and has
undertaken to raise an additional $10.0 million in equity. Management
believes that, if such funds are raised, they will satisfy cash
requirements through the year 2000. There can be no assurance that the
Company will secure this additional financing.
The Company plans to continue development of new products based upon
its core, patented technology during the next 12 months. This is expected
to include enhancements to the Company's existing products as well as
development of an Internet-based product. The number of employees could
increase over the next twelve months by as much as 30%. The most
significant area of increase would be in sales and marketing with lesser
increases in engineering and administration. Asset purchases are expected
primarily to equip newer employees as well as update the engineering
development equipment. It is not anticipated that the purchase of new
assets will be a significant financial expenditure.
Risk Factors
Limited Operating History and History of Substantial Operating Losses
The Company's current operations substantially commenced in May 1997.
Accordingly, the Company's prospects must be evaluated in light of the
problems, expenses, delays and complications normally encountered with any
early stage business. The Company has a history of substantial operating
losses since inception (June 1995) and has an accumulated deficit of
approximately $37.3 million as of December 31, 1998 and $44.6 million as of
September 30, 1999. For its fiscal years ended December 31, 1998, 1997 and
1996, the Company's losses from operations were $13.1 million, $15.8
million and $6.1 million, respectively. Such losses have resulted primarily
from costs incurred in research and development activities, the
establishment of an initial sales and marketing force, and general and
administrative expenses. The Company expects to incur additional operating
losses over the foreseeable future and expects cumulative losses to
increase substantially as the Company's
15
marketing, sales, and research and development efforts expand. The Company
is currently experiencing cash flow difficulties primarily because its
current expenses exceed its current revenues.
Need for Expanded Market Acceptance of the Company's Products;
Concentration of Revenue
The Company's 1998 product revenues, approximately $308,260, had been
derived primarily from sales of the prior versions of its Medley product
through the Company's relationship with SVA. The Company expects to derive
a substantial majority of its revenues in the foreseeable future from the
sale of CacheLink, its updated Medley product, and MIND, neither of which
has previously been marketed by the Company. Accordingly, the Company's
future financial performance will depend on the growth in demand for and
acceptance of new software products. As is typical in new and evolving
markets, demand for and market acceptance of products are subject to a high
level of uncertainty. The Company has limited experience in commercially
providing software products and services and the Company's MIND product is
still only a prototype and will not be available for commercial sale until
at least the second quarter of 2000. In addition, the small business market
is relatively young and there are few proven products. There can be no
assurance that the Company will generate business from these products or
that its market acceptance will increase. If these markets fail to develop,
develop more slowly than expected or attract new competitors, or if the
Company's products do not achieve market acceptance, the Company's
business, financial condition and results of operations will be materially
and adversely affected. In addition, the loss of SVA as a reseller could
have a material affect on the Company's business financial condition and
results of operations.
Expected Delisting
The Company does not intend to maintain its listing on the
OTCBB, which would require it to register its Common Stock under Federal
Securities laws by mid-December 1999. For the Common Stock to thereafter be
included for trading on the National Quotation Bureau "Pink Sheets,"
a market-maker must make certain filings with the National Quotation
Bureau. There can be no assurance that any such filings will be made or
that if made, the Common Stock will be accepted for inclusion into the
"Pink Sheets." Even if included, a trading market may not develop or be
sustained. Regardless, since there may not be a trading market for the
Common Stock, investors may not be able to liquidate their investment.
Uncertain Adoption of Internet as a Medium of Commerce and Communications
and Dependence on the Internet
Demand and market acceptance for recently introduced services and
products like those offered by the Company are subject to a high level of
uncertainty. The use of the Internet in marketing and advertising and
otherwise, particularly by those individuals and enterprises that have
historically relied upon traditional means of marketing and advertising,
generally requires the acceptance of a new way of conducting business and
exchanging information. Enterprises that have already invested substantial
resources in other means of conducting business and exchanging information
may be particularly reluctant or slow to adopt a new strategy that may make
their existing resources and infrastructure less useful. There can be no
assurance that the market for the Company's products will develop and if it
fails to develop, develops more slowly than expected or becomes saturated
with competitors, or if the Company's products do not achieve market
acceptance, the Company's business, operating results and financial
conditions will be materially adversely affected.
The Company's ability to derive revenues will also depend upon a robust
industry and the infrastructure for providing Internet access and carrying
Internet traffic. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary
infrastructure or timely development of complementary products, such as
high speed modems. Moreover, other critical issues concerning the
commercial use of the Internet (including security, reliability, cost,
ease-of-use, access, and quality of service) remain unresolved and may
impact the growth of Internet use. Because global commerce and online
exchange of information on the Internet and other similar open WANs are new
and evolving, it is difficult to predict with any assurance whether the
Internet will prove to be and remain a viable commercial marketplace. If
the infrastructure necessary to support the Internet's commercial viability
is not developed, or if the Internet does not become a viable marketplace,
the Company's business, operating results and financial condition would be
materially and adversely affected.
Intellectual Property; Changing Technology; Potential Infringement
The Company owns trademarks on "CacheLink," "Medley," "Mango,"
"MangoSoft," "Pool" and "Pooling." In addition, the Company has been
granted two patents and one Notification of Allowance and has applied for
six other patents. There can be no assurance, however, that the patents
will be issued, and if issued, there can be no certainty that claims
allowed in any such patents would provide competitive advantages or
protection for the Company's products, or that such claims will not be
successfully challenged by competitors. The Company considers certain
elements of its software and its Pooling technology to be proprietary. The
16
Company relies on a combination of trade secrets, copyright and trademark
law, contractual provisions, confidentiality agreements and certain
technology and security measures to protect its proprietary intellectual
property, technology and know-how.
The Company's business is subject to rapid changes in technology
including potential introduction of competing products and services which
could have a material adverse impact on the Company's business. There are
existing hardware-based file server and web caching products that could be
used as the basis for the development of technology that would be directly
competitive with the technology employed by the Company. In addition, there
can be no assurance that research and development by others will not render
the Company's technology obsolete or uncompetitive. Furthermore, in a
technology-based industry, there can be no assurance that a claim of patent
or other infringement will not be made against the Company. While the
Company is not aware of any such claims, no infringement studies have been
conducted on behalf of the Company.
Despite the Company's efforts to protect its proprietary rights,
existing copyright, trademark, patent and trade secret laws afford only
limited protection. Moreover, effective protection of copyrights, trade
secrets, trademarks and other proprietary rights may be unavailable or
limited in certain foreign countries and territories. There can be no
assurance that these domestic and foreign laws, in combination with the
steps taken by the Company to guard its proprietary rights, will be
adequate to prevent misappropriation of its technology or other proprietary
rights.
Regulatory Acceptance of the Company's Technology; Government Regulation,
Legal Uncertainties and Regulatory Policy Risks
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses
generally. However, due to the increasing media attention focused on the
Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
and pricing and characteristics and quality of products and services. The
adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the demand for the Company's
products and increase the Company's cost of doing business or cause the
Company to modify its operations, or otherwise have an adverse effect on
the Company's business, operating results and financial condition.
Moreover, the applicability to the Internet of existing laws governing
issues such as property ownership, libel and personal privacy is uncertain.
The Company cannot predict the impact, if any, that future regulation or
regulatory changes may have on its business.
Competition; No Substantial Barriers to Entry into the Company's Business;
Price Erosion
The markets for the Company's products are characterized by rapid
technological change, evolving industry standards, customer demands and
intense competition. The Company competes with a number of large public and
private companies, including many large computer and software designers
which have created technologies and products that perform similar and/or
competing functions to those of the Company's products. The Company also
competes with hardware providers that have bundled in a certain level of
networking functionality on top of the hardware, all-in-one Internet access
solutions and virtual office workspace offerings.
17
Many of the Company's competitors have greater resources, including
more extensive facilities, larger research and development teams, more
experienced marketing teams, greater capital resources and equipment, and
the ability to offer a broader range of services than the Company. As a
result, the Company's ability to remain competitive will depend in
significant part upon it being able to successfully and continually develop
and introduce, in a timely and cost-effective manner, enhancements to
existing products in response to both evolving demands of the marketplace
and competitive product offerings. In addition, over a long-term period,
the Company's ability to remain competitive will depend in significant part
upon its ability to develop and introduce, in a timely and cost-effective
manner, new products to expand and diversify the Company's product
offerings. There can be no assurance that the Company will be successful in
developing and introducing, in a timely and cost-effective way, any
enhancements or extension for existing products or any new products. In
addition, there can be assurance that the competitors of the Company will
not achieve technological advances that provide a competitive advantage
over the Company's products or that make such products obsolete.
Management of Growth; Dependence on Key Personnel and Ability to Attract
New Personnel
Even if the Company successfully generates significant revenue growth,
there can be no assurance that the Company will effectively develop and
implement systems, procedures or controls adequate to support the Company's
operations or that management will be able to achieve the rapid execution
necessary to fully exploit the opportunity for the Company's products. To
manage its business and any growth, the Company must continue to implement
and improve its operational and financial systems and continue to expand,
train and manage its employees. In particular, management believes that the
Company will need to hire additional employees. If the Company is unable to
manage growth effectively, the Company's business, operating results and
financial condition will be materially affected. The success of the Company
is dependent upon the efforts of Scott H. Davis, the Company's Vice
President and Chief Technology Officer; Robert E. Parsons, the Company's
Chief Financial Officer; and James M. Stark, the Company's Vice President
of Sales and Marketing. The loss of Mr. Davis, Mr. Parsons or Mr. Stark, or
of any of the Company's senior management, could delay or prevent the
Company from achieving its objectives. The Company is also highly dependent
upon its ability to continue to attract and retain additional management
and technical personnel because of the specialized nature of the Company's
business. Competition for such qualified personnel is intense, and there
can be no assurance that the Company will be able to retain existing
personnel or attract, assimilate or retain additional qualified personnel
necessary for the development of its business. The inability of the Company
to attract and retain qualified personnel would have a material adverse
effect on the Company's business, financial condition and results of
operations.
Risk of Errors or Failure in Software Products
Complex products such as CacheLink and Medley, or any new product which
may be developed by the Company in the future, may contain errors,
failures, bugs or defects, particularly when first introduced, and as
updates, upgrades and new versions are released. The introduction by the
Company of products with errors, failures, bugs, defects or otherwise with
reliability, quality or compatibility problems could result in adverse
publicity, product returns, reduced orders, uncollectible accounts
receivable, delays in collecting accounts receivable, product redevelopment
costs, loss of or delay in market acceptance of the Company's products, or
claims by the customer or others against the Company. Alleviating such
problems could require significant expenditures of capital and resources by
the Company's customers. Errors, failures, bugs or defects in the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
No Dividends
The Company intends to retain any future earnings to finance its
operations and does not intend to pay dividends.
18
Concentration of Share Ownership
The Company's directors and officers, together with entities affiliated
with them, beneficially own approximately 22% of the Company's capital
stock, including all outstanding options, warrants or other convertible
securities to purchase shares of the Company's Common Stock. These
stockholders, acting as a group, may continue to have significant influence
over the outcome of all matters submitted to the stockholders for approval,
including the election of a majority of the Company's Board of Directors
and the determination of all corporate actions after this Offering. The
voting power of these stockholders could also have the effect of delaying
or preventing a change in control of the Company. Such influence by
management could have the effect of discouraging others from attempting to
take-over the Company thereby increasing the likelihood that the market
price of the Common Stock will not reflect a premium for control.
Year 2000 Compliance
Many existing computer programs use only two digits, rather than four,
to represent a year. The Year 2000 ("Y2K") problem arises because
date-sensitive software or hardware written or developed in this fashion
may not be able to distinguish between 1900 and 2000, and programs written
in this manner that perform arithmetic operations, comparisons or sorting
of date fields may yield incorrect results when processing a Y2K date. The
Y2K problem could potentially cause system failures or miscalculations that
could disrupt operations.
The Company recently completed a review, which included testing, of the
Company's computer systems. This review of internal financial and
information technology systems was completed in the fourth quarter of 1998.
The Company has evaluated and prioritized the problems, which are not
considered significant.
The Company intends to continuously identify and prioritize critical
vendors and suppliers and communicate with them about their plans and
progress in addressing their Y2K problems. The Company has implemented a
policy to exclude the use of any vendors which are not Y2K compliant.
Based on the efforts described above, the Company currently believes
that its systems are Y2K compliant. However, there can be no assurance that
all Y2K problems have been successfully identified, or that the necessary
corrective actions were taken. Failure to successfully identify and
remediate such Y2K problems in a timely manner could have material adverse
effect on the Company's results of operations, financial position or cash
flow.
As of September 30, 1999, the Company had not incurred significant
costs related to the Y2K problem, and does not expect to do so in the
future. Overall, the Company anticipates that incremental costs to the
Company related to the Y2K problem will not exceed $50,000, but there
can be no assurance that such costs will not be greater than anticipated.
Registration Rights of Other Securityholders-Potential Costs to the
Company; Adverse Effects on Future Financing and Stock Price
Pursuant to the merger agreement by and among the Company and First
American, the Company is obligated to use reasonable efforts to file a
registration statement relating to the resale of up to 33% of the shares
of the Company's Common Stock sold in a Rule 506 Offering completed in
August of 1999 and 300,000 shares of the Company's Common Stock held by
the Placement Agent from that offering. The Company is obligated to use its
best efforts to have such registration statement declared effective as soon
as practicable after filing with the Securities Exchange Commission and
shall keep such registration statement effective for a period of at least
one year. These registration rights could result in substantial future
expense to the Company and could adversely affect any future equity or debt
financing. Furthermore, the sale of Common Stock held by or issuable to the
holders of registration rights, or even the potential of such sales, could
have an adverse effect on the market price of the Common Stock.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 30, 1999, one of the Company's shareholders filed suit in
Orange County (CA) Superior Court alleging damages for fraud in the sale of
securities under both federal and California state law seeking a rescission
of the purchase agreement governing such sale of securities. The
shareholder seeks damages in the amount of $50,000, plus interest. On
October 22, 1999, the matter was removed to Federal Court, following a
petition by the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In conjunction with the merger (the "Merger") of MangoMerger, a
wholly-owned subsidiary of First American, with and into MangoSoft,
pursuant to an Agreement and Plan of Merger, dated August 27, 1999, on
September 7, 1999, the Company issued 9,000,000 shares of Common Stock to
former noteholders of MangoSoft in exchange for the termination of
promissory notes in the aggregate amount of $6,000,000, plus accrued
interest. In connection with the issuance of such stock, the Company
relied on the statutory exemption provided by Section 4(2) of the
Securities Act of 1933, as amended (the "Act"), because the issuances did
not involve public offering.
In conjunction with the Merger, on September 7, 1999 the Company issued
options to purchase an aggregate of 120,000 shares of Common Stock at an
exercise price of $1.25 per share to former warrantholders of MangoSoft in
exchange for the termination of existing warrants. In addition, on
September 7, 1999, the Company issued options to purchase an aggregate of
1,397,268 shares of Common Stock at an exercise price of $1.25 per share to
former optionees of MangoSoft in exchange for the termination of existing
options. In connection with the issuances of such options, the Company
relied on the statutory exemption provided by Section 4(2) of the Act
because the issuances did not involve public offerings.
In conjunction with the Merger, on September 7, 1999 the Company issued
an aggregate of 6,008,998 shares of Common Stock to former holders of
capital stock of MangoSoft in exchange for capital stock of the MangoSoft.
In connection with the issuance of such stock, the Company relied on the
statutory exemption provided by Section 4(2) of the Act because the
issuance did not involve public offerings.
In conjunction with the Merger, on September 7, 1999 the Company issued
an aggregate of 4,875,000 shares of Common Stock to accredited investors
pursuant to Rule 506 of Regulation D, promulgated under the Act, because
the issuances did not involve public offerings.
ITEM 3. DEFAULTS UPON SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 2, 1999, MangoSoft provided to its stockholders an
information statement and merger consent solicitation in order to obtain
the consent of at least a majority of its stockholders to enter into the
Merger. On August 26, 1999, MangoSoft provided to its stockholders a
supplemental information statement and merger consent solicitation in order
to obtain the consent of at least a majority of its stockholders to enter
into the Merger. On August 30, 1999, MangoSoft obtained the consent of a
majority of its stockholders to enter into the Merger.
On September 1, 1999, MangoSoft provided a supplemental information
statement and merger consent solicitation to holders of debt of MangoSoft
in connection with the exchange of notes of MangoSoft for shares of Common
Stock of the Company. The Company obtained the unanimous consent of all
debt holders of MangoSoft on September 7, 1999.
20
On August 13, 1999, First American obtained the unanimous written
consent of its shareholders, authorizing a forward stock split, the
Merger, the name change of the Company, the adoption of the Company's 1999
Incentive Compensation Plan, and the election of Dale Vincent, Craig D.
Goldman, Dr. Ira Goldstein, Paul C. O'Brien, Selig Zises and Ravi Singh to
serve as directors of the Company following the Merger.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2.1* Agreement and Plan of Merger by and among First American,
MangoSoft and MangoMerger, dated as of August 27, 1999 (filed
without exhibits or schedules) (filed as Exhibit 2.1 to Form
8-K filed September 21, 1999)
3.1* Certificate of Amendment to the Articles of Incorporation of
First American, as filed with the Secretary of State of the
State of Nevada on September 7, 1999 (filed as Exhibit 4.2 to
Form 8-K filed September 21, 1999)
3.2 By-laws of the Company (formerly by-laws of MangoMerger).**
10 Lease of Westborough Office Park Building Five, dated November
10, 1995.**
11 Statement regarding computation of net loss per common
share.**
20.1 Merger Consent Solicitation and Information Statement, dated
August 2 1999.**
20.2 Supplement to Merger Consent Solicitation and Information
Statement, dated August 26, 1999.**
20.3 Supplement to Merger Consent Solicitation and Information
Statement, dated September 1, 1999.**
27 Financial Data Schedule
- ----------
* Exhibits designated with an asterisk (*) have previously been
filed with the Commission and are incorporated by reference to
the document referenced in parentheticals following the
description of such exhibits.
** Filed herewith.
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K on September 21, 1999, which
reported that MangoMerger, merged with and into MangoSoft, as provided
for in that certain Agreement and Plan of Merger, dated August 27, 1999
between First American, MangoMerger and MangoSoft, effective as of
September 7, 1999, pursuant to a Certificate of Merger filed with the
Secretary of State of Delaware on that date. In conjunction with the
Merger, First American changed its name to "MangoSoft, Inc."
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 19, 1999 MANGOSOFT, INC.
/s/ Robert Parsons
----------------------------------------
Robert Parsons, Chief Financial Officer
(Principal Financial and Accounting
Officer)
22