UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM ______________ TO ________________
Commission File Number 333-5278-NY
AGATE TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in charter)
Delaware 94-3334052
(State or other (IRS Employer
jurisdiction Identification No.)
of incorporation)
46782 Lakeview Boulevard
Fremont, California 94538
(Address of principal executive offices)
(510) 492-5430
(Issuer's telephone number)
CHECK WHETHER THE ISSUER (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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[ ]
The Company had 12,932,004 shares of common stock, par value $0.0001 per share
outstanding as of October 31, 1999.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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INDEX
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF
SEPTEMBER 30, 1999 (UNAUDITED) AND MARCH 31, 1999. 1
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998. 2
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE SIX MONTHS ENDED SEPTEMBER 30,
1999 AND 1998. 3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDING
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS OF SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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PART 1. FINANCIAL INFORMATION
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, March 31,
1999 1999
-------------------- ----------------------
(Unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $1,121,031 $2,012,603
Trade accounts receivable, less allowance
for doubtful accounts $19,457 (March 31, 1999: $27,999) 268,425 194,533
Inventory 409,417 395,279
Other current assets and prepaids 57,848 50,048
-------------------- ----------------------
TOTAL CURRENT ASSETS
Restricted cash 115,823 149,897
Property, furniture and equipment, net 90,553 120,412
Other Assets 27,925 27,925
==================== ======================
TOTAL ASSETS $2,091,022 $2,950,697
==================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 175,225 $ 131,868
Accrued liabilities 398,282 429,313
Long term debt, current portion 60,187 178,133
Obligation under capital lease, current portion 2,449 6,328
-------------------- ----------------------
TOTAL CURRENT LIABILITIES 745,642
Long term debt, net of current portion 0 4,798
-------------------- ----------------------
TOTAL LIABILITIES 636,143 750,440
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, $0.0001 par value 15,000,000 shares authorized in
September, 1999 and 10,000,000 shares authorized in March, 1999 Issued and
outstanding shares:1,825,000 in
September, 1999 and 2,075,000 in March, 1999 183 7,256,589
Liquidation Preference $6,387,500
Common Stock, $0.0001 par value
75,000,000 shares authorized in September, 1999 and,
20,000,000 shares authorized in March, 1999
Issued and outstanding shares: 12,932,004 in
September, 1999 and 7,050,000 in March, 1999 1,293 1,188,068
Additional paid in capital 8,918,846 234,663
Accumulated other comprehensive loss (35,058) (30,458)
Accumulated deficit (7,430,385) (6,448,605)
-------------------- ----------------------
TOTAL STOCKHOLDERS' EQUITY 1,454,879 2,200,257
==================== ======================
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $2,091,022 $2,950,697
==================== ======================
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<CAPTION>
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net sales $380,793 $335,238 $740,524 $461,202
Cost of sales 176,595 103,418 228,570 165,557
---------------- --------------- --------------- ----------------
Gross profit 204,198 231,820 511,954 295,645
Operating Expenses
Research and development 159,286 227,678 309,513 464,603
Sales and marketing 258,526 213,936 543,639 481,303
General and administrative 316,910 182,950 618,468 449,978
Expense from discontinued operation
of wholly owned subsidiary - - - 37,526
---------------- --------------- --------------- ----------------
Total operating expenses 734,722 624,564 1,471,620 1,433,409
---------------- --------------- --------------- ----------------
Operating loss (530,524) (392,744) (959,666) (1,137,765)
Interest and other income 24,559 35,442 42,319 71,610
Interest expense and other expense, net (1,309) 1,085 (6,828) (805)
---------------- --------------- --------------- ----------------
Loss before income taxes (507,274) (356,217) (924,175) (1,066,960)
Income Taxes (37,714) - (57,605) -
================ =============== =============== ================
Net Loss $(544,988) $(356,217) $(981,780) $(1,066,960)
================ =============== =============== ================
Net loss per common share-basic and fully diluted $ (0.04) $ (0.03) $ (0.08) $ (0.10)
Shares used in calculating net loss per common 12,932,004 10,575,000 11,788,335 10,575,000
share-basic and fully diluted
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AGATE TECHNOLOGIES, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended
September 30,
-----------------------------------------
1999 1998
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $ (981,780) $(1,066,960)
Adjustments to reconcile net loss to net
cash used for operating activities
Loss on disposal of property, equipment 364 26,304
Depreciation 40,572 53,047
Changes in assets and liabilities
Accounts receivable (73,892) (74,603)
Inventories (14,138) (879)
Prepaid expense and other assets (7,800) (60,923)
Accounts Payable and accrued liabilities 12,326 111,790
----------------- ------------------
Net cash used in operating activities (1,024,348) (1,012,224)
CASH FLOW FROM INVESTING ACTIVITIES
Restricted cash 34,074 (51,040)
Acquisition of property and equipment (11,678) (24,387)
Proceeds from sale of property and equipment 600 17,000
Acquisition of /Proceeds from sales of other LT assets - (1,067)
----------------- ------------------
Net cash provided by/(used in) investing activities 22,996 (59,494)
CASH FLOW FROM FINANCING ACTIVITIES
Payment of notes payable (122,744) (24,369)
Payment of Capitalized Leases (3,878) (4,047)
Net Proceeds from Issuance of common stock 241,002 -
----------------- ------------------
Net Cash provided by/(used in) financing activities 114,380 (28,416)
Effect of exchange rate changes on cash (4,600) -
----------------- ------------------
Net (Decrease) in cash and cash equivalents (891,572) (1,100,134)
Cash and cash equivalents at beginning of period 2,012,603 3,837,882
----------------- ------------------
Cash and cash equivalents at end of period $1,121,031 $2,737,748
================= ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest 6,804 805
Income Tax 57,605 -
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<CAPTION>
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1, 1999 2,075,000 $ 7,256,589 7,050,000 $1,188,068 $ 234,663
Net loss for the six months ended September 30, 1999
Foreign Currency translation adjustment
Comprehensive loss
Issuance of common stock for cash 321,336 241,002
Conversion of preferred stock into common stock (250,000) (875,000) 250,000 875,000
Exchange of Agate-California common stock (7,621,336) (2,304,070) 2,304,070
for Agate-Delaware (formerly ARCA) common stock 11,432,004 1,143 (1,143)
Exchange of Agate-California preferred stock (1,825,000) (6,381,589) 6,381,589
for Agate-Delaware (formerly ARCA) preferred stock 1,825,000 183 (183)
Issuance of Agate-Delaware common stock
in exchange for common stock of ARCA
upon Merger with Agate-Delaware 1,500,000 150 (150)
----------------------------------------------------------------------------
Balance at September 30, 1999 1,825,000 $ 183 12,932,004 $ 1,293 $ 8,918,846
----------------------------------------------------------------------------
ACCUMULATED TOTAL
OTHER COMPREHENSIVE STOCKHOLDERS'
ACCUMULATED COMPREHENSIVE INCOME EQUITY
DEFICIT INCOME (LOSS) (LOSS) (DEFICIT)
---------- ---------- ---------- ----------
BALANCE AT APRIL 1, 1999 $ (6,448,605) $(30,458) $2,200,257
Net loss for the six months ended September 30, 1999 (981,780) $ (981,780) (981,780)
Foreign currency translation adjustment (4,600) (4,600) (4,600)
===============
Comprehensive loss $ (986,380)
===============
Issuance of common stock for cash
Common stock subscription receivable upon
Issuance of common stock for cash 241,002
Conversion of preferred stock into common stock
Exchange of Agate-California common stock
for Agate-Delaware (formerly ARCA) common stock
Exchange of Agate-California preferred stock
for Agate-Delaware (formerly ARCA) preferred stock
Issuance of Agate-Delaware common stock
in exchange for common stock of ARCA
upon Merger with Agate-Delaware
----------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30, 1999 $ (7,430,385) $ (35,058) $1,454,879
----------------------------------------------------------------------------
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AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A- ORGANIZATION AND CONSOLIDATION
Agate Technologies Inc., a Delaware corporation and its subsidiaries are engaged
in the design, development and marketing of proprietary data storage and
management software solutions and products for computing environments in the
home and business enterprise markets. The consolidated financial statements
include its wholly owned subsidiaries, Agate Technologies (California), Inc; ei
Corporation; ATI Malaysia Sdn Bhd; and Agate Cayman International Ltd. ei
Corporation was incorporated on June 25, 1999, and commenced operations in mid
August, 1999. Agate Cayman International was recently formed as a holding
company for its international operations. Operations of ATI Malaysia Sdn Bhd
have been discontinued but it remains a legal entity.
All material intercompany accounts and transactions have been eliminated in the
financial statements.
NOTE B- INTERIM ADJUSTMENTS AND USE OF ESTIMATES
The accompanying consolidated financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission for interim financial statements. Therefore they do not include all
the disclosures required by generally accepted accounting principles.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these Consolidated
Condensed Financial Statements be read in conjunction with the financial
statements and notes included in the Company's audited financial statements as
of and for the fiscal years ended December 31, 1998, and 1997, and the
three-month period ended March 31, 1999, included in the Form 8-K/A-1 filed by
the Company on August 13, 1999.
The unaudited financial information furnished herein reflects all adjustments
consisting of normal recurring items which in the opinion of management are
necessary and fairly state the company's financial position and the results of
its operations for the periods presented. Operating results for the three months
and six months ended September 30, 1999, are not necessarily indicative of the
results that may be expected for the entire fiscal year ending March 31, 2000.
NOTE C - BACKGROUND TO ACQUISITION TRANSACTION IN JUNE 1999
On June 29, 1999, all former shareholders of Agate Technologies Inc., a
California Corporation which is now named Agate Technologies (California), Inc.
("Agate-California"), were issued shares in ARCA Corp, a New Jersey corporation
("ARCA"), with no known assets or liabilities, in exchange for the contribution
of their Agate-California shares. Each common shareholder received 1.5 ARCA
common shares for each Agate-California share exchanged. Each Series A Preferred
shareholder received an equal number of ARCA Series A Preferred Shares, which
had substantially identical rights, preferences, privileges, and restrictions,
except that each share is convertible into 1.5 ARCA common shares. As a result,
shareholders of Agate-California owned in excess of 90% of ARCA's outstanding
shares and Agate-California became a wholly owned subsidiary of ARCA. The
transaction between ARCA and Agate-California is being considered to be an
acquisition of ARCA by Agate-California.
On June 30, 1999, ARCA was merged into its other wholly-owned subsidiary, Agate
Technologies, Inc., a Delaware corporation ("Agate-Delaware"), in order to
re-incorporate ARCA in Delaware. Agate-Delaware has Series A Preferred Stock
that has identical rights, preferences, privileges and restrictions, to the ARCA
Series A Preferred Stock. Each ARCA shareholder received one share of
Agate-Delaware in exchange for each ARCA share.
NOTE D- Net Loss per Share
Basic and diluted net loss per common share are presented in conformity with FAS
No. 128 "Earnings per Share"("FAS 128") for all periods presented. In accordance
with FAS 128, basic and diluted loss per share has been computed using the
weighted average number of shares of common stock outstanding during the period.
The weighted average number of common shares outstanding, for all periods
presented, has given effect to the exchange of 1.5 common shares of ARCA for
each common share of Agate-California (see note C above). Common stock
equivalents associated with stock options have been excluded from the weighted
average shares outstanding since the effect of these securities would be
anti-dilutive.
Summary of Significant Accounting Policies
The summary of significant accounting policies is included in the notes to the
consolidated financial statements for the three-month period ended March 31,
1999, and the fiscal years ended December 31, 1998, and 1997, which were audited
and appear in the Form 8K/A-1 filed by the Company on August 13, 1999.
ITEM 2.
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FORWARD LOOKING STATEMENTS
The statements contained in this report on Form 10-QSB that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of
1934, including statements regarding Agate's expectations, hopes, intentions,
beliefs, or strategies regarding the future. Forward looking statements include
the Company's statements regarding liquidity, anticipated cash needs and
availability, and anticipated expense levels in "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Forward looking
statements contained herein or in other statements made by the Company are made
based on management's expectations and beliefs concerning future events and
trends impacting the Company and are subject to uncertainties and risks that
could cause actual results of the Company to differ materially from those
matters expressed in or implied by forward-looking statements. The Company
believes that the following factors, among others, could affect its future
performance and cause actual results of the Company to differ materially from
those expressed in or implied by forward looking statements made by or on behalf
of the Company: (a) the effect of changes in interest rates (b) the demand for
its products and the stability of its suppliers (c) uninsurable risks and (d)
general economic conditions. Other risks which could also so affect Company
performance and results are discussed in the "Risks Factors" section below. In
this report, the words "anticipates, "believes", "expects", "intends", "future",
"hope" and similar expressions identify forward looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
BACKGROUND OF COMPANY
Agate Technologies, Inc., a Delaware corporation (the "Company"), is engaged,
through its subsidiary, Agate Technologies (California), Inc., a California
corporation ("Agate-California"), in designing, developing, and marketing of
proprietary software for data management and storage solutions and products for
the PC market. The Company also licenses customized hot swap, plug and play,
software as integrated solutions to major OEMs and PC manufacturers. The
Company's proprietary technology products (software and hardware subsystems and
services) are centered around interchangeable storage and are designed to offer
users high system availability, mobility, and inter-operability across PC
platforms. The Company's general strategy is to provide "Data Ready",
cost-effective solutions which offer users in home and corporate computing
environments with easy data accessibility and data mobility, compared to today's
high end systems.
The Company incorporated a new subsidiary, ei Corporation, which commenced
operations in mid August 1999 to spearhead the marketing and distribution of the
group's products through selective channels. Agate International Cayman Ltd. was
also formed during the current quarter as a holding company for the group's
international operations.
The Company has incurred losses from operations since inception and had an
accumulated deficit of $7,430,385 as at September 30, 1999. The cumulative
losses were a result of significant research and development costs and sales and
marketing expenses. Currently, about 54% of the Company's assets of $2,091,022
are represented by cash or cash equivalents.
RESULTS OF OPERATIONS
For the three-month and six-month periods ended September 30, 1999
GENERAL - During the quarter ended September 30, 1999, the Company completed its
incorporation of two subsidiaries, ei Corporation and Agate International Cayman
Ltd., to strategically position the group's activities and strengthen its
operations and marketing focus to optimize business opportunities in different
segments. ei Corporation was formed to establish the group's penetration into
retail distribution and marketing of the group's product and services. Agate
International Cayman Ltd, was formed as a holding company to handle the group's
international operations.
REVENUE - Revenue for the quarter ended September 30, 1999, was $380,793, an
increase of 14% as compared to $335,238 for the quarter ended September 30,
1998. For the six-month period ended September 30, 1999, revenue increased by
61% to $740,524 compared to $461,202 in the corresponding period in September
30, 1998.
Product revenues increased 28% in the most recent quarter to $279,019 compared
to $218,412 for the quarter ended September 30, 1998. Licensing revenue, however
decreased 13% to $101,774 for the quarter ended September 30, 1999, from
$116,826 in the quarter ended September 30, 1998. The decrease in licensing
revenue during the current quarter was due to end-of-life status of various OEM
notebook projects and the Company's focus towards bundling of its products for
retail and distribution to expand and broaden its revenue. It is not expected
that licensing revenue would contribute significantly to revenue growth in the
future, as the Company move towards bundling and distribution of products. The
Company's general strategy is to focus on building channel distribution for its
products and services which provide cost-effective solutions to the everyday PC
user in home and corporate environments.
The Company, through its wholly owned subsidiary, ei Corporation, commenced
productization of the group's technology and services for introduction into VAR
and distribution channels. The products include the HotData family and software
products, "ProSwap" and "Hot Shadow". With the extension of the Company's move
into distribution through ei Corporation, the Company hopes to achieve a broader
revenue base.
Revenue growth for the Company, with the move into distribution, will be
dependent upon several factors, including especially market acceptance of the
Company's products. As described under "Liquidity and Capital Resources" below,
the Company will need to raise additional financing for working capital and
marketing during 2000.
GROSS MARGIN - Gross margin for the three and six months ended September 30,
1999, were $204,198 (54% of revenue) and $511,954 (69% of revenue). Gross margin
for the three and six months ended September 30, 1998, were $231,820 (69% of
revenue) and $295,645 (64% of revenue). The decrease in gross margins in the
current quarter was due to the higher proportion of licensing and service
revenues in the quarter ended September 30, 1998. The Company expects licensing
and service revenues, as a proportion of total revenue, to decrease in the
future, in line with its strategy of expanding into distribution.
During the quarter ended September 30, 1999, licensing and service revenue
represented 27% of total revenue compared to 35% of total revenue in the
comparable quarter ended September 30, 1998, while for the six months ended
September 30, 1999, such revenues represented 48% of total revenue compared to
35% in the comparable six-month period in 1998.
Cost of sales for the bundled products consists primarily of cost of materials,
inward freight, and packaging and for software products, it includes software
packaging, documentation and physical media costs.
In a continuing effort to maintain and improve margins in a competitive industry
environment, management has focused on quality, flexibility, and product cost
reductions. From time-to-time, margins are adversely affected by pricing
pressures. The Company emphasizes product cost reductions in its research and
development activities and frequently reviews its supplier relationships with
the view to obtaining the best prices available. In addition, the Company is
considering effecting further cost reductions by relocating its logistics and
shipment to lower cost centers in Asia.
TOTAL OPERATING EXPENSE - For the quarter ended September 30, 1999, total
operating expenses were $734,722 compared to $624,564 for the comparative period
ended September 30, 1998. Operating expenses for the six-month period ended
September 30, 1999, were $1,471,620 compared to $1,433,409 for the six-month
period ended September 30, 1998.
SALES AND MARKETING EXPENSE - Sales and marketing expenses increased 21% from
$213,936 in 1998 to $258,526 in 1999 for the quarter ended September 30.
Expenses for the first six months ended September 30, 1999, were $543,639
compared to $481,303 in the six months ended September 30, 1998. The increase in
the second quarter of 1999 is mainly the result of increased sales and marketing
activities as the Company`s subsidiary company, ei Corporation gears up its
marketing efforts in the retail and VAR channels.
The Company does not intend to increase its sales & marketing headcount but will
continue work through a select network of external sales representative to
complement its lead generation efforts. It is anticipated, however, that
marketing expenses will grow as the Company promotes its products through
co-operative marketing programs, trade show participation and select media
coverage. There is no assurance, however, that the Company will be successful in
its efforts and the extent of the Company's marketing penetration will largely
depend on market acceptance of the Company's products and the success of its
promotional efforts. The Company will need to raise financing in 2000 to fund
the revenue growth.
GENERAL AND ADMINISTRATIVE EXPENSE - General and administrative expense
increased to $ 316,910 in the three months ended September 30, 1999 compared to
$182,950 in the comparative period ended September 30, 1998. Expenses for the
six-month period ending September 30, 1999 were $618,468 compared to $449,978 in
the comparable six-month period ending September 30, 1998. For the current
quarter and the six-month period ended September 30, 1999, the significant
increase in expenses was mainly due to acquisition costs and higher professional
(legal, audit, and other) fees resulting from the acquisition of ARCA and the
Company's new reporting requirements as a public company. These expenses were
$134,086 in the quarter ended September 30, 1999, compared to $55,355 in the
comparable quarter ended September 30, 1998.
RESEARCH AND DEVELOPMENT EXPENSE - Research and Development expenses decreased
30% from $227,678 in the three-month period ending September 30, 1998, to
$159,286 in the three-month period ended September 30, 1999. Expenses in the
six-month period ended September 30, 1998, were $464,603 compared to $309,513 in
the corresponding six-month period ended September 30, 1999. This decrease
primarily was due to a headcount decrease in certain development areas resulting
from the completion of projects associated both with newly released bundled
products and more mature OEM software products. The Company will continue to
streamline its development resources focusing on the software development team
while outsourcing any hardware development requirements to outside contractors.
To extend its software development and minimize costs, the Company plans to site
part of its development team in Asia. The Company is continuing to invest in the
enhancement of product lines aimed at sales opportunities that the Company
believes will expand its installed base of customers.
Research and development expenses are anticipated to be maintained at the
present level and could vary depending on phases in the Company's product
development efforts.
INTEREST AND OTHER INCOME - Interest and other Income consists primarily of
interest income earned on cash and cash equivalents, income received from
sublease and fixed asset disposal.
Interest and other income decreased to $ 24,559 in the three months ended
September 30, 1999, compared to $35,442 in the three months ended June 30, 1998.
For the six-month period ended September 30, 1999, interest and other income was
$42,319 compared to $71,610 for the six-month period ended September 30, 1998.
The drop in interest and other income for the current quarter was primarily due
to reduced interest earnings stemming from a lower cash balance.
INTEREST AND OTHER EXPENSE - Interest and Other Expense represent interest
expenses and loss from sale of fixed assets.
For the six-month period ended September 30, 1999, interest and other expenses
increased to $6,828 compared to $805 in the comparable six-month period ended
September 30, 1998. The increase was due to a higher usage of the bank line of
credit to finance the working capital requirements.
LIQUIDITY AND CAPITAL RESOURCES
The discussion below regarding liquidity and capital resources should be read
together with the information included in the year-end Consolidated Financial
Statements.
As at September 30, 1999, the Company's principal sources of liquidity consisted
of cash and cash equivalents of $1,121,031 compared to $2,012,603 as at March
31, 1999. The Company's net cash used in operating activities was $1,024,348 for
the six months ended September 30, 1999, compared to $1,012,224 for the six
months ended September 30, 1998.
During the six months ended September 30, 1999, the Company received $241,002 in
proceeds from issuance of common stock. The Company used $1,024,348 in operating
activities, incurred $11,678 in the acquisition of equipment, and repaid
$122,744 in bank loans and notes payable and $3,878 in capitalized leases. The
net decrease in cash was $891,572. The Company had $1,121,031 in cash on
September 30, 1999, excluding cash held in restricted accounts.
The Company has available a revolving line of credit of up to $2,000,000 based
on a borrowing base formula of 70% of eligible accounts receivable and 30% of
inventory (capped at $250,000), with 50% of the outstanding loan amount to be
secured by cash deposit.
The Company's future liquidity and capital requirements will depend on numerous
factors, including without limitation the progress of the Company's product
development programs, the resources the Company devotes to developing and
marketing its products, and the extent to which the Company's products generate
market acceptance and demand.
The Company believes that its cash is adequate to last through March 31, 2000,
if the amount of cash used in operating activities during the second half of
fiscal 2000 is the same as that used in the first half. The Company believes
such cash would last longer if necessary through active cash management and
expense reductions The Company is beginning to actively seek debt or equity
financing. There can be no assurance that the Company will succeed in its fund
raising efforts or that any monies raised will be on terms which are not
materially adverse to the Company.
OTHER FACTORS AFFECTING FUTURE RESULTS:
RECENT AND EXPECTED LOSSES. From inception, the Company has never been
profitable. There can be no assurance that it ever will generate positive
revenues from its operating activities, or that it will achieve and sustain a
profit during any future period. Failure to achieve significant revenues or
profitability would materially and adversely affect the Company's business,
financial condition, and results of operations.
MARKET ACCEPTANCE OF BUNDLED PRODUCTS. The Company is phasing out of the
business of licensing software to OEMs and is introducing bundled products into
the VAR, retail, and OEM channels through ei Corporation. The Company's bundled
products are relatively new and unproven. There can be no assurance that there
is a viable market for these products. The Company's marketing arm, ei
Corporation, is also new. Even if there is a viable market for the Company's
bundled products, there can be no assurance that ei Corporation can successfully
penetrate such market. In this regard, unless the Company raises additional
financing as described below, ei Corporation's efforts will be constrained by a
lack of resources to adequately promote the bundled products.
NEED FOR ADDITIONAL CAPITAL. Although the Company anticipates that its current
cash balance will be sufficient to meet the Company's capital requirements
through March of 2000, there can be no assurance that the Company will not
require additional sources of cash at an earlier date. This will depend on the
revenues generated in the upcoming periods, and the timing of required
expenditures. The Company anticipates requiring additional cash in fiscal 2001
and is beginning active efforts to raise such financing. There can be no
assurance that capital will be available on terms acceptable to the Company, if
at all. The Company's operations would be severely constrained if it is unable
to raise financing during 2000.
CONCENTRATION OF CONTROL. The Company is controlled in the majority by Francis
Khoo and Vincent and Shirley Ooi through their individual ownership and
ownership through Pacific Rim. As a result, these shareholders may be able to
exercise significant influence over all matters involving shareholder approval,
including the election of directors and approval of significant corporate
transactions.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant
extent upon a number of key management employees, in particular, upon Francis
Khoo and Vincent and Shirley Ooi. Loss of the services of any one of them would
be materially detrimental. The Company has key person life insurance on some of
these individuals, but there can be no assurance that proceeds from the
insurance would be sufficient. There can be no assurance that the Company will
be successful in retaining these individuals and other key technical and
management personnel.
PERSONNEL RECRUITMENT. The Company intends to recruit a chief operating officer
who will be critical to the success of the company. There can be no assurance
that such person will be located. Also the Company needs to retain current and
recruit additional engineering talent which is difficult in the intensely
competitive job market of Silicon Valley. If the Company is unable to obtain and
retain highly skilled individuals to fulfill technical and managerial functions,
the Company's business and financial condition may be materially affected.
SUPPLY RELATIONSHIPS WITH THIRD PARTIES. The Company will be dependent upon the
hardware products of third parties for its products that are "bundled" with
other products for sale. There is no assurance that the relationship between the
Company and the third parties will continue to be beneficial to the Company.
There can be no assurance that the third parties will continue to produce
products in the future that retain their current level of market acceptance,
that the products will continue to be available in adequate quantities at the
times required by the Company, or that the third party products will not contain
defects or errors. The Company may experience lost revenues due to the third
party's delay in correcting defects in their products, delay in getting an
adequate supply of their products to the Company, or from any resulting loss of
market share.
UNEXPLORED MARKETS. The Company is actively looking for new OEMs and markets and
distribution channels for its newly released products. There can be no assurance
that the Company will be successful in these regards.
TECHNOLOGICAL CHANGE AND MARKET COMPETITION. Competition in the data storage
industry is intense, and the industry is characterized by changing technologies
and customer demands for new products. Third parties could develop products and
technologies which cause those of the Company to become obsolete. Most of the
Company's competitors have significantly greater financial, development,
marketing and other resources than the Company. In light of the intense
competition in the industry, there can be no assurance that the Company will be
successful in its ability to enhance current products and develop and introduce
future products that will achieve market acceptance. The Company's future is
largely dependent on development of new products. While these products are
largely developed, there can be no assurance that these products will be
successfully or timely completed.
IMPACT OF THE YEAR 2000 ISSUE The Company has determined that its current
computer systems are Year 2000 ready and would function properly with respect to
dates in the year 2000 and beyond. However, the Company has plans to replace its
current computer systems to meet the needs of the business as the Company
continues to grow. The replacement system will be Year 2000 compliant. The
Company has yet to initiate discussions with all of its third-party
relationships to ensure that those parties have appropriate plans to remedy Year
2000 issues where their systems impact the Company's operation. The Company is
assessing the extent to which its operations are vulnerable should those
organizations fail to properly remedy their computer systems. While the Company
believes its planning efforts are adequate to address its Year 2000 concerns,
there can be no guarantee that the systems of other companies on which the
Company's operations rely will be converted on a timely basis and will not have
a material effect on the Company. The cost of the Year 2000 initiative is not
expected to be material to the Company's results of operations or its financial
position.
MINIMAL MARKET IN AGATE STOCK. Prior to its take-over by Agate-California
shareholders on June 29, 1999, ARCA stock was very thinly traded. The three
market makers sold less than 10,000 shares during the first five months of 1999.
During the quarter ended September 30, 1999, the market remained thin as only
16,650 Company shares were traded. There can be no assurance that any material
trading market will develop for the Company's stock. Such lack of active trading
may cause a hesitance to purchase Company shares on the part of potential
shareholders due to the perceived iliquidity of the shares, thereby perpetuating
the lack of a market in the stock and a corresponding artificial depression in
value of Company stock.
INTELLECTUAL PROPERTY. The Company has copyrighted its software executable code.
However, to protect the remainder of its intellectual property, the Company
currently relies primarily on trade secret law and the Company's perpetual
innovation of its products. The nature of the Company's product line is such
that the products are susceptible to reverse engineering by competitors. The
Company has applied for a patent to protect some of its technology; however,
there can be no assurance that such patent will be granted, and if it should be
granted, that it will be sufficient to be effective against competitors. In
addition, there can be no assurance that a third party has not filed or will not
file applications for patents or obtain additional proprietary rights that will
prevent, limit, or interfere with the Company's ability to make, use, or sell
its products. In the event the Company found it necessary to acquire a license
to a product from a third party, there can be no assurance that such license
would be available, or if available, that it would be available on terms
acceptable to the Company, or that the Company could successfully redesign its
products to avoid infringement of the third party's patent.
SUPPLY OF PUBLIC STOCK. Currently only 550,000 shares are available for trading
in the public market under SEC rules. Six months after June 29, 1999, the
closing date of the ARCA acquisition, an additional 450,000 shares become
available. Eleven and one-half months after such closing date an additional
450,000 shares become available, and twelve months after such closing date,
another 13,500,000 shares become available for trading. The large availability
of shares for trading could affect the market adversely and drive the market
price down.
SUBORDINATION. The Company's common stock is subordinate to its 1,850,000 shares
of outstanding Series A Preferred Stock. In addition, the Company's common stock
will be subordinate to any future preferred stock that the Company creates and
issues. No vote of the Company's common shareholders is required to issue
preferred stock.
MANUFACTURING. The Company's custom ASIC HotChip is sole sourced. The Company
attempts to reduce the adverse impact a problem with the supplier could cause by
maintaining a safety stock; however, there can be no assurance that the Company
would be able to replace the supplier before its safety stock ran out.
PART 2. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
NONE
ITEM 2. CHANGES IN SECURITIES
NONE
ITEMS 3 DEFAULTS ON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 OTHER INFORMATION
NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(a) (1) The financial statements filed as part of this Report at Item 1 are
listed in the Index to Financial Statements and Financial Statement Schedules on
page 2 of this Report.
(a)(2) The following exhibits are filed with or incorporated by
reference into this Quarterly Report on Form 10-QSB:
3.01 Registrant's Articles of Incorporation as amended to date are hereby
incorporated by reference from Exhibit O to Exhibit 10.19 to Registrant's
Current Report on Form 8-K, dated June 4, 1999, and filed June 10, 1999.
3.02 Registrant's bylaws, as amended to date (incorporated by reference to
Registrant's Current Report on Form 8-K, dated June 4, 1999), and filed June 10,
1999.
4.0 Exhibit 3.01 above is hereby incorporated by reference.
27.00 Financial Data Schedule
(b) Reports on Form 8-K
A Report on Form 8-K dated June 28, 1999, was filed July 9, 1999. The Form
reported the following items:
Item 1. Changes in Control of Registrant
Item 2. Acquisition and Disposition of Assets
Item 4. Change in Registrant's Certifying Accountant
Item 7. Financial Statements and Exhibits
Item 8. Change in Fiscal Year
However, no financial statements were provided at the time of filing due to the
impracticality of providing such statements. These financial statements were
contained in Amendment 1 to this Form 8-K which was filed on August 13, 1999,
and the financial data statement was contained in Amendment 2 to this Form 8-K
which was filed on August 18, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AGATE TECHNOLOGIES, INC.
Date: November 11, 1999 ______________________________
By: Francis CS Khoo
Chairman of the Board and CEO
<PAGE>
<TABLE>
<CAPTION>
Exhibit 1: Earnings Per Share Schedule Version 1
10/25/1999
AGATE TECHNOLOGIES, INC.
EARNINGS PER SHARE SCHEDULE - REVISED (11/08/99) Three months ended September
30, 1999
Calculation of Net Income
<S> <C>
Net Income (Loss) $(544,988)
Weighted Average Shares Outstanding 12,932,004
---------------
Net Income (Loss) Per Share $(0.04)
===============
Calculation of Weighted Average Number of Shares
Date Activity Shares Revised Days Total Ratio Weighted
Outstanding Days Average
Number of
Shares O/S
3/31/99 Balance b/f 7,050,000 10,575,000 88 91 88/91 10,226,374
6/28/99 Issued 321,336 482,004
-------------------------------
7,371,336 11,057,004 1 91 1/91 121,506
6/29/99 ARCA transaction 3,685,668
---------------
---------------
11,057,004
6/29/99 ARCA 1,500,000 1,500,000
-------------------------------
12,557,004 12,557,004
6/29/99 Issued 375,000 375,000
-------------------------------
6/30/99 12,932,004 12,932,004 2 91 2/91 284,220
=============== ===============
3/31/99 Balance c/f 91 10,632,099
=============== ===============
7/1/99 Balance b/f 12,932,004 12,932,004 92 92 92/92 12,932,004
============================================== ===============
9/30/99 Balance c/f 12,932,004 12,932,004 92 12,932,004
============================================== ===============
<PAGE>
Exhibit 1: Earnings Per Share Schedule Version 1
10/25/1999
AGATE TECHNOLOGIES, INC.
EARNINGS PER SHARE SCHEDULE -
REVISED (11/08/99) Six months
ended September 30, 1999
Calculation of Net Income
Net Income (Loss) $(981,780)
Weighted Average Shares Outstanding 11,788,335
----------------
Net Income (Loss) Per Share $(0.08)
================
Calculation of Weighted Average Number of Shares
Date Activity Shares Revised Days Total Ratio Weighted
Outstanding Days Average
Number of
Shares O/S
3/31/99 Balance b/f 7,050,000 10,575,000 88 183 88/183 5,085,246
6/28/99 Issued 321,336 482,004
-----------------------------
7,371,336 11,057,004 1 183 1/183 60,421
6/29/99 ARCA transaction 3,685,668
---------------
---------------
11,057,004
6/29/99 ARCA 1,500,000 1,500,000
-----------------------------
12,557,004 12,557,004
6/29/99 Issued 375,000 375,000
-----------------------------
6/30/99 12,932,004 12,932,004 2 183 2/183 141,333
============== ================
3/31/99 Balance c/f 91 183 5,287,000
============== ================
7/1/99 Balance b/f 12,932,004 12,932,004 92 183 92/183 6,501,335
=========================================== ================
9/30/99 Balance c/f 12,932,004 12,932,004 92 183 6,501,335
=========================================== ================
=========================================== ================
12,932,004 12,932,004 183 183 11,788,335
=========================================== ================
<PAGE>
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES EXHIBIT-27: FINANCIAL DATA SCHEDULE Version 1
6-ME SEPTEMBER 30, 1999 10/25/1999
Exhibit 27FDS: Financial Data Schedule
AGATE TECHNOLOGIES INC., AND SUBSIDIARIES
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001006762
<NAME> AGATE TECHNOLOGIES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,121,031
<SECURITIES> 0
<RECEIVABLES> 287,882
<ALLOWANCES> (19,457)
<INVENTORY> 409,417
<CURRENT-ASSETS> 1,856,721
<PP&E> 299,552
<DEPRECIATION> (208,999)
<TOTAL-ASSETS> 2,091,022
<CURRENT-LIABILITIES> 636,143
<BONDS> 0
0
183
<COMMON> 1,293
<OTHER-SE> 1,453,403
<TOTAL-LIABILITY-AND-EQUITY> 2,091,022
<SALES> 740,524
<TOTAL-REVENUES> 740,524
<CGS> 228,570
<TOTAL-COSTS> 228,570
<OTHER-EXPENSES> 1,471,620
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,804
<INCOME-PRETAX> (924,175)
<INCOME-TAX> 57,605
<INCOME-CONTINUING> (981,780)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (981,780)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
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