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, 2002
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: 0-30781
MANGOSOFT, INC.
(Exact name of small business issuer as specified in its charter)
Nevada 87-0543565
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1500 West Park Drive, Suite 190
Westborough, MA 01581
(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. 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 27,352,033 Shares
$0.001 Par Value (Outstanding on August 13, 2002)
MANGOSOFT, INC. AND SUBSIDIARY
INDEX TO FORM 10-QSB
Page
PART I. FINANCIAL INFORMATION
ITEM 1 - Condensed Consolidated Financial Statements (unaudited):
Balance Sheets as of June 30, 2002 and December 31, 2001 ............................................. 3
Statements of Operations for the Three Months Ended June 30, 2002 and 2001 ........................... 4
Statements of Operations for the Six Months Ended June 30, 2002 and 2001 ............................. 5
Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 ............................. 6
Notes to the Condensed Consolidated Financial Statements ............................................. 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 10
PART II OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K. ........................................................... 18
Signatures ........................................................................................... 19
2
MANGOSOFT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2002 2001
---- ----
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ............................... $ 2,976,572 $ 6,911,906
Accounts receivable ..................................... 146,638 41,925
Prepaid expenses and other current assets ............... 154,138 199,653
------------ ------------
Total current assets ............................... 3,277,348 7,153,484
Property and equipment - net ................................. 673,342 875,533
Intangibles - net ............................................ 283,306 --
Other assets ................................................. 41,205 2,400
------------ ------------
Total ......................................... $ 4,275,201 $ 8,031,417
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................ $ 773,212 $ 772,919
Accrued compensation .................................... 377,171 309,426
Other accrued expenses and current liabilities .......... 268,629 154,683
------------ ------------
Total current liabilities .......................... 1,419,012 1,237,028
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Common stock ............................................ 27,352 27,002
Additional paid-in capital .............................. 89,332,907 89,560,431
Deferred compensation ................................... (843,681) (1,678,303)
Accumulated deficit ..................................... (85,660,389) (81,114,741)
------------ ------------
Total stockholders' equity ......................... 2,856,189 6,794,389
------------ ------------
Total ......................................... $ 4,275,201 $ 8,031,417
============ ============
See notes to the unaudited condensed consolidated financial statements.
3
MANGOSOFT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30,
-----------------------------
2002 2001
---- ----
(Unaudited)
Software license revenues ..................................... $ 5,553 $ 55,080
Service revenues .............................................. 111,706 4,890
------------- -------------
Total revenues ........................................... 117,259 59,970
Costs and expenses:
Cost of software license revenues ........................... -- 9,844
Cost of services (1) ........................................ 227,615 294,327
Engineering and development (1) ............................. 802,602 920,658
Selling and marketing (1) ................................... 271,733 525,159
General and administrative (1) .............................. 922,979 1,327,614
Stock-based compensation expense ............................ 174,349 264,614
------------- -------------
Loss from operations ..................................... (2,282,019) (3,282,246)
Interest income ............................................... 18,805 141,048
------------- -------------
Net loss $ (2,263,214) $ (3,141,198)
============= =============
Net loss per share - basic and diluted ....................... $ (0.08) $ (0.12)
Weighted average shares outstanding - basic and diluted ....... 27,352,033 26,957,142
(1) Excludes stock-based compensation expense as follows:
Cost of services ......................................... $ 16,125 $ 16,775
Engineering and development .............................. 71,518 53,305
Selling and marketing .................................... 4,609 17,117
General and administrative ............................... 82,097 177,417
See notes to the unaudited condensed consolidated financial statements.
4
MANGOSOFT, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
(Unaudited)
Software license revenues ...................................... $ 7,053 $ 182,350
Service revenues ............................................... 201,674 16,250
------------ -----------
Total revenues ............................................ 208,727 198,600
Costs and expenses:
Cost of software license revenues ............................. -- 25,844
Cost of services (1) .......................................... 425,776 672,142
Engineering and development (1) ............................... 1,497,335 2,050,677
Selling and marketing (1) ..................................... 570,163 1,293,081
General and administrative (1) ................................ 1,952,890 2,691,557
Stock-based compensation expense .............................. 355,448 765,887
------------ -----------
Loss from operations ...................................... (4,592,885) (7,300,588)
Interest income ................................................ 47,237 365,053
------------ -----------
Net loss ....................................................... $ (4,545,648) $(6,935,535)
============ ===========
Net loss per share - basic and diluted ........................ $ (0.17) $ (0.26)
Weighted average shares outstanding - basic and diluted ........ 27,270,818 26,957,115
(1) Excludes stock-based compensation expense as follows:
Cost of services ........................................... $ 32,250 $ 39,892
Engineering and development ................................ 143,036 207,716
Selling and marketing ...................................... 15,968 179,751
General and administrative ................................. 164,194 338,528
See notes to the unaudited condensed consolidated financial statements.
5
MANGOSOFT, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
------------------------
2002 2001
---- ----
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $ (4,545,648) $ (6,935,535)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization ....................................... 336,427 267,730
Stock-based compensation ............................................ 355,448 765,887
Increase (decrease) in cash from the change in:
Accounts receivable ............................................... (104,713) 4,653
Prepaid expenses and other current assets ......................... 45,515 (4,196)
Accounts payable .................................................. 293 (352,896)
Accrued compensation .............................................. 67,745 46,377
Other accrued expenses and current liabilities .................... 113,946 (55,259)
------------ ------------
Net cash used by operating activities ............................ (3,730,987) (6,263,239)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ................................... (29,347) (146,639)
Cash paid for fileTRUST assets .......................................... (175,000) --
------------ ------------
Net cash used by investing activities ............................ ( 204,347) (146,639)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock .......................... -- 375
------------ ------------
Net cash provided by financing activities ........................ -- 375
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................... (3,935,334) (6,409,503)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................... 6,911,906 17,354,025
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................ $ 2,976,572 $ 10,944,522
============ ============
NON CASH ACTIVITIES:
Fair value of common stock and warrants issued in
connection with the purchase of the fileTRUST assets ................ $ 252,000 $ --
============ ============
See notes to the unaudited condensed consolidated financial statements.
6
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.
From its inception through the year ended December 31, 2001, the Company
was considered to be a development stage company because it had not generated
significant revenues from products and had not commercially launched its
principal product line. In January 2001, the Company launched its principal
product and began to recognize revenues from the sale of this product. As such,
effective January 1, 2001, the Company was deemed to have exited the development
stage.
The accompanying unaudited condensed consolidated financial statements have
been prepared on the same basis as the annual financial statements. In the
opinion of management, all significant adjustments, which are normal, recurring
in nature and necessary for a fair presentation of the financial position, cash
flows and results of the operations of the Company, have been consistently
recorded. The operating results for the interim periods presented are not
necessarily indicative of expected performance for the entire year.
The unaudited information should be read in conjunction with the audited
financial statements of the Company and the notes thereto for the year ended
December 31, 2001 included in the Company's Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission.
As shown in the unaudited condensed consolidated financial statements,
during the six months ended June 30, 2002 and 2001, the Company incurred net
losses of $4,545,648 and $6,935,535, respectively. Cash used in operations
during the six months ended June 30, 2002 and 2001 was $3,730,987 and
$6,263,239, 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.
2. BUSINESS COMBINATION
On February 11, 2002, the Company acquired the fileTRUST online data
storage service and related assets from FleetBoston Financial Corporation
("FleetBoston"). Under the terms of the purchase, the Company paid $175,000 in
cash, issued 350,000 shares of its common stock and warrants to purchase 150,000
shares of its common stock at an exercise price of $0.53 per share. The
aggregate fair value of the common stock was $182,000, which was based on the
closing price of the Company's common stock on February 11, 2002. The aggregate
fair value of the warrants was $70,000, which was determined using the
Black-Scholes valuation model using the following assumptions: expected life of
the warrants, 5 years; volatility, 127%; and the risk free interest rate, 4.25%.
As part of the transaction, FleetBoston and the Company entered into a
two-year enterprise license agreement for the internal use of fileTRUST by
FleetBoston. In addition, the two companies will continue to market fileTRUST
under a cooperative marketing agreement. Under the terms of this cooperative
marketing
7
agreement, the Company is required to issue warrants to purchase its common
stock to FleetBoston based on certain revenue targets, not to exceed 850,000
warrants over this two-year period. The 850,000 warrants have been accounted for
as contingent consideration and will be recognized as additional purchase price
as the revenue targets are achieved.
The total aggregate consideration rendered for this transaction totaled
approximately $427,000. The Company has not completed its final allocation of
the purchase price to the net assets acquired. The following presents the
preliminary allocation of the purchase price:
Cash paid ............................................. $ 175,000
Fair value of common stock issued ..................... 182,000
Fair value of warrants issued ......................... 70,000
---------
Purchase price ........................................ $ 427,000
=========
Software and acquired technology ...................... $ 329,000
Computer equipment .................................... 54,000
Other identifiable intangible assets .................. 44,000
---------
$ 427,000
=========
The software and acquired technology represents the fileTRUST operating
software that has reached technological feasibility and has future economic
value. The other identifiable intangible assets are comprised of customer
relationships and the fileTRUST service mark. The computer equipment will be
depreciated over its estimated useful lives, generally not to exceed three
years. The software and acquired technology will be amortized over three years.
The other identifiable intangible assets have indefinite lives and will not be
amortized but will be subject to an impairment analysis in accordance with
Statement of Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets."
The operations of the fileTRUST assets prior to the acquisition were not
material to the Company's financial statements.
3. STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees in accordance
with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees." 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 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, 2002
and 2001, there were 1,701,662 and 2,705,282 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 2,584,167 shares of the Company's common stock. The options
were originally issued between October 1999 and December 2000 and had exercise
prices ranging from $1.88 to $5.00 per share. The exercise price for these
options was reduced to $1.03, 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, 2002 and 2001, there were 2,283,634 and
2,120,609 outstanding options, respectively, to purchase the Company's common
stock that were repriced and subject to variable plan accounting.
8
During the six months ended June 30, 2002, the Company recorded stock-based
compensation expense of $355,448. This expense 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. During the six months ended June 30, 2001, the
stock-based compensation expense totaled $765,887. This expense was due
primarily to the amortization of $598,064 in fixed awards. In addition,
stock-based compensation of $99,163 was recognized in connection with the
Company's issuance of 92,973 options to non-employees in lieu of cash
compensation. The remainder of the stock-based compensation expenses was
recorded as a result of the effects of the decrease in the quoted market price
of the Company's common stock and its effect on outstanding stock options
accounted for as variable awards.
The Company did not record any stock-based compensation on stock options
accounted for as variable awards for the six months ended June 30, 2002 because
the closing market price of the Company's common stock was less than the
exercise price of these options.
4. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing net loss applicable
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net loss per common 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, 2002 and 2001, 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.
5. RECENT DEVELOPMENTS
The Company has reduced its work force on three separate occasions since
April 23, 2001. Effective April 23, 2001, the Company implemented an
approximately 40% reduction in its work force. In connection with this work
force reduction, the Company eliminated the positions held by two members of
senior management in addition to twenty-three (23) other employees. Effective
June 28, 2002, the Company implemented an approximate 50% reduction in its
existing work force. The remaining twenty (20) employees took a ten percent
reduction in salary. Effective August 5, 2002, the Company reduced its work
force to thirteen (13) persons. This reduction represents an approximate 35%
reduction in its existing personnel. In connection with this work force
reduction, the Company eliminated the positions held by two members of senior
management.
In June 2002, the Company retained Adams, Harkness & Hill, Inc., an
investment bank, to provide investment banking and financial advisory services.
9
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, 2001
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.
Mangomind(TM) is multi-user, business-oriented, peer-to-peer file sharing
service, 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.
In May 2002, we launched our Mangomind(R) Enterprise Server Software. The
Mangomind Enterprise Server Software extends the Mangomind service to medium to
large sized organizations the require data to be stored behind their corporate
firewall. The Mangomind Enterprise Server Software integrates easily into
existing networks and data centers and is scalable for organizations of any
size.
Cachelink(TM) 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.
In February 2002, we acquired the fileTRUST(TM) online storage service and
related assets from FleetBoston Financial Corporation ("FleetBoston"). fileTRUST
is a secure Internet service for storing electronic data and allowing file
access via any Internet connected computer and a web browser. fileTRUST allows
users to invite guests to upload and download files from the fileTRUST storage
box and send and receive email messages and file attachments. Files are
protected with SSL encryption during transfer over the Internet. Concurrent with
this purchase, we executed a two-year enterprise license agreement for the
internal use of fileTRUST by FleetBoston. In addition, we entered into a
two-year cooperative marketing agreement with FleetBoston whereby FleetBoston
will continue to market fileTRUST as well as other MangoSoft products and
services.
From our inception in June 1995 through our fiscal year ended December 31,
2000, we were considered to be a development stage company because we had not
generated significant revenues from our products and had not commercially
launched our principal product line. In January 2001, we launched the Mangomind
10
service, our principal product, and began to recognize revenues from its sale.
As such, effective January 1, 2001, we were deemed to have exited from the
development stage.
Critical Accounting Policies
Our accounting policies are described in our Annual Report on Form 10-KSB
for the period ended December 31, 2001 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:
Revenue Recognition - We recognize revenue generated from the sale of our
Mangomind and fileTRUST services as the services are provided to our end
customers. We recognize revenues generated from the sale of our Cachelink and
Mangomind Enterprise Server Software product when pervasive evidence of an
arrangement exists, the price is fixed and determinable, delivery has occurred
and collection is probable.
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.
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-parties 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 results will continue to fluctuate. These
fluctuations can be significant.
Deferred Taxation - Because of the significant operating losses incurred
and the 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 the Mangomind and fileTRUST services. These
expenses consist primarily of salaries and related personnel costs, the cost of
our outsourced data center and the license royalties we pay to our e-security
software provider for the 128-bit encryption used in the Mangomind service and
the Mangomind Enterprise Server Software.
Engineering and Development - 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.
Other Operating Expenses - Selling and marketing expenses consist primarily
of salaries and related personnel costs and additional costs incurred to market
our products and services such as the costs of
11
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.
Reductions in Force - We have reduced our work force on three separate
occasions since April 23, 2001 due to adverse economic conditions and our need
to conserve capital. Effective April 23, 2001, we reduced our work force by
twenty-five (25) employees, or approximately 40% of our then existing work
force. Effective June 28, 2002, we reduced our work force by twenty (20)
employees, or approximately 50% of our existing work force. Our remaining twenty
(20) employees took a ten percent reduction in salary. Effective August 5, 2002,
we reduced our work force to thirteen (13) employees.
Results of Operations - Three Months Ended June 30, 2002 and 2001
Revenues for the three months ended June 30, 2002 increased $57,289 or 96%
to $117,259 from $59,970 for the comparable period in 2001. The increase in our
revenues was attributable to a $106,816 increased in service revenue offset by a
decrease in software license revenue of $49,527 over the two periods. Customers
representing more than 10% of our revenues for the three-month period ended June
30, 2002 were FleetBoston, New York Life Insurance Company ("New York Life") and
Veritas Software Corporation ("Veritas"), approximately 32%, 17% and 14%,
respectively. In 2001, sales under our July 13, 2000 Value Added Reseller
Agreement with 3Com Corporation ("3Com") represented approximately 90% of our
revenues for the three months ended June 30, 2001. No other customer accounted
for more than 10% of our revenues for either period.
We recognized $5,553 in software license revenues for the three months
ended June 30, 2002 as compared to $55,080 during the same period in 2001, a
decrease of $49,527. This decrease was primarily due to the decline in software
license sales of our Cachelink product. In 2001, sales of Cachelink to 3Com were
$54,000 during the three-month period ended June 30, 2001. We concluded our
reselling agreement with 3Com in 2001. We are currently seeking alternative
channels to distribute the Cachelink product.
In May 2002, we launched our Mangomind Enterprise Server Software product.
We completed a $113,700 sale of this product to New York Life, which we will
recognize over the period of the maintenance contract, twelve (12) months. We
deferred $108,965 of this sale at June 30, 2002.
We recognized $70,692 from the sale of our Mangomind service and $41,014
from the sale of our fileTRUST service during the three months ended June 30,
2002. During the same period in 2001, we recognized $4,890 from the sale of our
Mangomind service.
We incur cost of software license revenues when we ship electronic media
and other Cachelink product materials under our agreement with 3Com. For the
three months ended June 30, 2001, we incurred $9,844 in disk replication costs
in connection with our sales of $54,000 to 3Com. There were no such costs
incurred in the three-month period ended June 30, 2002.
Cost of services for the three months ended June 30, 2002 decreased $66,712
or 23% to $227,615 compared to $294,327 for the comparable period in 2001. The
decrease in the cost of delivering our services was primarily a result of our
continued overhead reductions, our switch to a lower cost data center and
decreased personnel costs as a result of our April 2001 work force reduction.
Engineering and development expense for the three-month period ended June
30, 2002 decreased $118,056 or 13% to $802,602 from $920,658 for the comparable
period in 2001. The decrease in engineering and development expense was
primarily a result of our April 2001 work force reduction.
12
For the three-month period ended June 30, 2002, other operating expenses
including selling and marketing and general and administrative expenses
decreased $658,061or 36% to $1,194,712 compared with $1,852,773 for the
comparable period in 2001. 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 in addition
to reductions in our marketing, selling and general and administrative personnel
associated with our April 2001 work force reduction.
Stock-based compensation expense of $174,349 was recorded for the
three-month period ended June 30, 2002 compared to $264,614 for the comparable
period in 2001. 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 footnote 3 to the condensed consolidated financial statements).
Our loss from operations decreased $1,000,227 to $2,282,019 for the
three-month period ended June 30, 2002 compared with a loss from operations of
$3,282,246 for the comparable period in 2001 as a result of the above factors.
Interest income decreased $122,243 to $18,805 for the three months ended
June 30, 2002 compared to $141,048 for the three months ended June 30, 2001. The
decrease was attributable to the reduced balances of our interest-bearing cash
accounts as a result of our use of cash in operations as well as a decrease in
the rate of return on our investments in 2002 as compared to 2001.
Results of Operations - Six Months Ended June 30, 2002 and 2001
Revenues for the six months ended June 30, 2002 increased $10,127 to
$208,727 compared with $198,600 for the comparable period in 2001. The increase
in our revenues was attributable to a $185,424 increase in service revenue
offset by a $175,297 decrease in software license revenue. Customers
representing more than 10% of our revenues for the six-month period ended June
30, 2002 were FleetBoston, New York Life, and Veritas, approximately 28%, 20%
and 15%, respectively. In 2001, sales to 3Com and Kacom, Inc., a Korea-based
systems integrator, represented approximately 73% and 13% of our revenues. No
other customer accounted for more than 10% of our revenues for either period.
Prior to our fiscal year ending December 31, 2002, the majority of our
revenues were generated from the sale of the Cachelink product. Sales generated
under our Value Added Reseller Agreement with 3Com of $144,000 and sales to
Kacom of $25,500 represented approximately 73% and 13%, respectively, of our
total revenues for the six-month period ended June 30, 2001. We concluded our
agreement with 3Com in 2001. In May 2002, we launched our Mangomind Enterprise
Server Software product. We completed a $113,700 sale of this product to New
York Life, which we will recognize over the period of the maintenance contract,
twelve (12) months. We deferred $108,965 of this sale at June 30, 2002.
We recognized $138,785 from the sale of our Mangomind service and $62,889
from the sale of our fileTRUST service during the six months ended June 30,
2002. During the same period in 2001, we recognized $16,250 from the sale of our
Mangomind service.
Cost of software license revenues for the six months ended June 30, 2001
consisted primarily of disk replication costs incurred in connection with our
sales of Cachelink to 3Com. There were no such costs incurred in the six-month
period ended June 30, 2002.
Cost of services for the six months ended June 30, 2002 decreased $246,366
or 37% to $425,776 compared to $672,142 for the comparable period in 2001. The
decrease in the cost of delivering our services was primarily a result of our
continued overhead reductions, our switch to a lower cost data center and
decreased personnel costs as a result of our April 2001 work force reduction.
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Engineering and development expenses for the six months ended June 30, 2002
decreased $553,342 or 27% to $1,497,335 from $2,050,677 for the comparable
period in 2001. The decrease in engineering and development expense was
primarily a result of our April 2001 work force reduction.
Other operating expenses including selling and marketing and general and
administrative expenses for the six months ended June 30, 2002 decreased
$1,461,585 or 37% to $2,523,053 compared with $3,984,638 for the comparable
period in 2001. 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 in addition to reductions in
our marketing, selling and general and administrative personnel associated with
our April 2001 work force reduction.
Stock-based compensation expense of $355,448 was recorded for the six-month
period ended June 30, 2002 compared to $765,887 for the comparable period in
2001. 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 footnote 3 to the
condensed consolidated financial statements).
Our loss from operations decreased $2,707,703 to $4,592,885 for the
six-month period ended June 30, 2002 compared with a loss from operations of
$7,300,588 for the comparable period in 2001 as a result of the above factors.
Interest income decreased $317,816 to $47,237 for the six months ended June
30, 2002 compared to $365,053 for the six months ended June 30, 2001. The
decrease was attributable to the reduced balances of our interest-bearing cash
accounts as a result of our use of cash in operations as well as a decrease in
the rate of return on our investments in 2002 as compared to 2001.
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, 2002 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, 2002, we had a cash balance of approximately $3.0 million and
working capital of approximately $1.9 million. Excluding our facility lease and
other minor equipment leases with aggregate annual commitments totaling
approximately $453,000 in 2002 and $192,000 in 2003, we do not have any
long-term obligations.
In June 2002, we retained Adams, Harkness & Hill, Inc., an investment bank,
to provide investment banking and financial advisory services.
In February 2002, we acquired the fileTRUST online data storage service and
related assets from FleetBoston for $175,000 in cash, 350,000 shares of our
common stock and warrants to purchase 150,000 shares of our common stock at
$0.53 per share. The total aggregate consideration for this transaction was
approximately $427,000. We acquired approximately $329,000 of software and
acquired technology, $54,000 of computer equipment and related hardware and
$44,000 in other identifiable intangible assets. Concurrent with this purchase,
we executed a two-year enterprise license agreement for the internal use of
fileTRUST by FleetBoston. We expect to recognize approximately $350,000 in
revenues under this agreement over the next two years.
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During the year ended December 31, 2001, we emerged from the development
stage when we began recording commercial sales on both our Cachelink product and
Mangomind service.
As shown in the unaudited condensed consolidated financial statements,
during the six months ended June 30, 2002 and 2001, we incurred net losses of
$4,545,648 and $6,935,535, respectively. Cash used in operations during the six
months ended June 30, 2002 and 2001 was $3,730,987 and $6,263,239, 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 approximately $85.7 million as of June 30, 2002. For the six months
ended June 30, 2002 and the year ended December 31, 2001, our net losses were
$4.5 million and $11.2 million, respectively. We have historically experienced
cash flow difficulties primarily because our expenses have exceeded our
revenues. We expect to incur additional operating losses and expect cumulative
losses to increase substantially as our marketing, sales, and research and
development efforts expand. These factors, among others, raise significant doubt
about our ability to continue as a going concern. If we are unable to generate
sufficient revenue from our operations to pay expenses or we are unable to
obtain additional financing on commercially reasonable terms, our business,
financial condition and results of operations will be materially and adversely
affected.
We Will Need Additional Financing.
We will require substantial additional capital to finance our future growth
and product development. 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 Performance Depends On Market Acceptance Of Our Products.
We expect to derive a substantial portion of our future revenues from the
sales of the Mangomind and fileTRUST services as well as the Mangomind
Enterprise Server Software. If markets for our products and services 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 in Part 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 and services to their customers. Our
inability to enter into and retain strategic relationships or the inability of
such technology companies to effectively market our products and services could
materially and adversely affect our business, operating results and financial
condition.
There May Be Limited Liquidity in Our Common Stock and Its Price May Be Subject
To Fluctuation.
Our common stock is currently traded on the OTC Bulletin Board and there is
only a limited market for our common stock. We can provide no assurance 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, the market price of our common stock will be materially and
adversely affected.
SEC Rules Concerning Sales of Low-Priced Securities May Hinder Re-Sales of Our
Common Stock.
Because our common stock has a market price 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 for the brokerage firms 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.
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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 assurance 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 such 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 proprietary intellectual property, technology
and know-how. However, we can provide no assurance that our rights in our
intellectual property will not be infringed upon by competitors or that
competitors will not similarly make claims against us for infringement. If we
are required to be involved in litigation involving intellectual property
rights, our business, operating results and financial condition will be
materially and adversely affected.
Our Success Depends on Key Personnel.
Our success is dependent upon the efforts of our senior management
personnel. The loss of members of our senior management group could have a
material adverse effect on our business. In addition, competition for qualified
personnel in the computer software industry is intense, and we can provide no
assurance that we will be able to retain existing personnel or attract and
retain additional qualified personnel necessary for the development of our
business. Our inability to attract and retain such personnel would have a
material adverse effect on our business, financial condition and results of
operations.
Defects In Our Software May Adversely Affect Our Business.
Complex software products and services such as the software developed by
MangoSoft may contain defects when introduced and also when updates, upgrades
and new versions are released. Our introduction of software with defects or
quality problems could 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 and services or
claims by customers or others against us. Such problems or claims could have a
material adverse effect on our business, financial condition and results of
operations.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
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)
99.1 1999 Incentive Compensation Plan, as amended and restated on May 1,
2000.(2)
99.2 Form of Subscription Agreement for purchase of common stock, dated
as of March 20, 2000.(2)
99.3 Form of Warrant Agreement.(2)
99.4 Value Added Reseller Agreement, dated July 14, 2000, between
MangoSoft, Inc. and 3Com Corporation.(5)
(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/A for an event
dated January 11, 2000 and hereby incorporated by reference thereto.
(5) Filed as an exhibit to our Registration Statement on Form 10-SB/A,
filed August 30, 2000, and hereby incorporated by reference thereto.
(b) Report on Form 8-K:
None.
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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.
August 14, 2002 MANGOSOFT, INC.
/s/ Robert E. Parsons
-----------------
Robert E. Parsons
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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