<PAGE>
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 DECEMBER 31, 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 January 25, 2000.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
INDEX
1. FINANCIAL
PART INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF
DECEMBER 31, 1999 (UNAUDITED) AND MARCH 31, 1999. 2
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED
DECEMBER 31, 1999 AND 1998. 3
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) FOR THE NINE MONTHS ENDED DECEMBER 31,
1999 AND 1998. 3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999. 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 6
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
</TABLE>
Page 2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 686,133 $ 2,012,603
Trade accounts receivable, less allowance
for doubtful accounts $19,457 (March 31, 1999: $27,999) 232,652 194,533
Inventory 407,274 395,279
Other current assets and prepaids 56,011 50,048
----------- -----------
TOTAL CURRENT ASSETS 1,382,070 2,652,463
Restricted cash 114,363 149,897
Property, furniture and equipment, net 75,422 120,412
Other Assets 27,925 27,925
=========== ===========
TOTAL ASSETS $ 1,599,780 $ 2,950,697
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 96,306 $ 131,868
Accrued liabilities 407,086 429,313
Long term debt, current portion 9,475 178,133
Obligation under capital lease, current portion - 6,328
----------- -----------
TOTAL CURRENT LIABILITIES 512,867 745,642
Long term debt, net of current portion - 4,798
----------- -----------
TOTAL LIABILITIES 512,867 750,440
STOCKHOLDERS' EQUITY
Convertible Preferred Stock, $0.0001 par value 15,000,000 shares
Issued and outstanding shares:1,825,000 in
December, 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
Issued and outstanding shares: 12,932,004 in
December, 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 (7,798,351) (6,448,605)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,086,913 2,200,257
=========== ===========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 1,599,780 $ 2,950,697
=========== ===========
</TABLE>
Page 3
<PAGE>
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
---------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales $ 344,284 $ 419,498 $ 1,084,807 $ 880,700
Cost of sales 110,582 118,094 339,152 283,651
----------- ----------- ----------- -----------
Gross profit 233,702 301,404 745,655 597,049
Operating Expenses
Research and development 109,988 177,832 419,502 642,435
Sales and marketing 387,126 299,066 908,425 780,369
General and administrative 235,547 256,650 884,004 706,628
Discontinued operations of wholly owned subsidiary (133,709) - (133,709) 37,526
----------- ----------- ----------- -----------
Total operating expenses 598,952 733,548 2,078,222 2,166,958
----------- ----------- ----------- -----------
Operating loss (365,250) (432,144) (1,332,567) (1,569,909)
Interest and other income 17,460 37,656 55,180 109,959
Interest expense and other expense, net (2,290) (6,534) (9,118) (8,032)
----------- ----------- ----------- -----------
Loss before income taxes (350,080) (401,022) (1,286,505) (1,467,982)
Income Taxes (5,636) (11,903) (63,241) (11,903)
=========== =========== =========== ===========
Net Loss $ (355,716) $ (412,925) $(1,349,746) $(1,479,885)
=========== =========== =========== ===========
Net loss per common share-basic and fully diluted $(0.03) $(0.04) $(0.11) $(0.14)
Shares used in calculating net loss per common 12,932,004 10,575,000 12,170,945 10,575,000
share-basic and fully diluted
</TABLE>
Page 4
<PAGE>
AGATE TECHNOLOGIES, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(1,349,746) $(1,479,885)
Adjustments to reconcile net loss to net
cash used in operating activities
Loss on disposal of property, equipment 464 31,527
Depreciation 59,362 76,478
Changes in assets and liabilities
Accounts receivable (38,119) (65,943)
Inventories (11,995) (135,804)
Prepaid expense and other assets (5,963) (92,750)
Accounts Payable and accrued liabilities (57,790) 341,468
----------- -----------
Net cash used in operating activities (1,403,787) (1,324,909)
CASH FLOW FROM INVESTING ACTIVITIES
Restricted cash 35,534 (118,954)
Acquisition of property and equipment (15,436) (30,268)
Proceeds from sale of property and equipment 600 19,920
Other - (1,067)
-----------
Net cash provided by/(used in) investing activities 20,698 (130,369)
CASH FLOW FROM FINANCING ACTIVITIES
Payment of notes payable (173,456) (28,467)
Payment of Capitalized Leases (6,327) (6,185)
Net Proceeds from Issuance of common stock 241,002 -
----------- -----------
Net Cash provided by/(used in) financing activities 61,219 (34,652)
Effect of exchange rate changes on cash (4,600) 4,401
----------- -----------
Net (Decrease) in cash and cash equivalents (1,326,470) (1,485,529)
Cash and cash equivalents at beginning of period 2,012,603 3,837,882
----------- -----------
Cash and cash equivalents at end of period $ 686,133 $ 2,352,353
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest 8,203 1,959
Income Tax 63,241 11,903
</TABLE>
Page 5
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AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
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 nine months ended December 31, 1999
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 December 31, 1999 1,825,000 $ 183 12,932,004 $ 1,293 $8,918,846
------------- -------------- -------------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS
DEFICIT INCOME (LOSS) (LOSS) EQUITY
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT APRIL 1, 1999 $ (6,448,605) $ (30,458) $ 2,200,257
Net loss for the nine months ended December 31, 1999 (1,349,746) $ (1,349,746) (1,349,746)
Foreign Currency translation adjustment (4,600) (4,600) (4,600)
-------------
Comprehensive loss $ (1,354,346)
-------------
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 DECEMBER 31, 1999 $ (7,798,351) $ (35,058) $ 1,086,913
------------ ------------- ------------- ------------
</TABLE>
Page 6
<PAGE>
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; Agate Cayman International Ltd; and Agate
Technologies Pte 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. Agate Technologies Pte Ltd, a Singapore incorporated company, became a
wholly owned subsidiary of Agate Cayman International in October 1999.
All material intercompany accounts and transactions have been eliminated in the
financial statements.
NOTE B- BASIS OF PRESENTATION AND REALIZATION OF ASSETS
The financial statements have been prepared on a basis that contemplates the
Company's continuation as a going concern and the realization of assets and
liquidation of liabilities in the ordinary course of business. The Company has
an accumulated deficit of $7,798,351 at December 31, 1999,and negative cash
flows from operations of $1,403,787 for the nine months ended December 31, 1999.
The Company anticipates that its current cash balance will be sufficient to meet
the Company's capital requirements through March 31, 2000, and for somewhat
beyond. However 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 the 2000 calendar year.
NOTE C- 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 nine months ended December 31, 1999, are not necessarily indicative of the
results that may be expected for the entire fiscal year ending March 31, 2000.
NOTE D - 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.
Page 7
<PAGE>
("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 E- 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
With effect from October 1999, the Company changed its inventory valuation
policy from the First-In, First-Out method to the Weighted Average method. This
change was necessary to cater to the Company's new accounting software which
values inventory by the Weighted Average Cost method. As there were no
significant price fluctuations during the three months ended December 31, 1999,
the effect of this change was immaterial.
The other accounting policies remain unchanged.
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.
Page 8
<PAGE>
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 planned new Web service and DRS product
launch, anticipated bundled product revenue increase, expected increase in R&D
and marketing expenses, liquidity, and anticipated cash needs and availability
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) ability to raise financing, (b) demand for
Company products, (c) effectiveness of marketing and promotion, and (d) ability
to complete development of new products and services. Other risks which could
also so affect Company performance and results are discussed in the "Risks and
Other Factors Affecting Future Performance" 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.
OVERVIEW
Agate Technologies Inc., a Delaware corporation (the "Company"), is a holding
company whose subsidiaries are engaged in various high technology enterprises.
The Company, through its domestic and international subsidiaries, designs,
develops, and markets proprietary software for data management and connectivity
and instant data availability for the PC market. The Company also licenses
customized hot swap, plug and play, software as integrated solutions to major
notebook and desktop OEMs and PC manufacturers. The Company's proprietary
technology products (software and subsystems solutions and services) are
centered around user friendly interchangeable storage 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 home users and small corporate computing environments
convenient data accessibility and mobility, compared to today's high end
systems.
The Company plans to develop a new interactive Web technology service business
which would help expand "Data Ready" concept. This Web business would provide a
new generation of services capable of delivering interactive content and
applications to users, providing users with the ability to customize and
synchronize their data more speedily and efficiently through a personalized
interface. The market for Internet and e-commerce products and services,
however, is characterized by evolving industry standards, rapid technological
change and frequent new product introductions and enhancements. Accordingly, the
Company's success in this new Web business would depend in a large part on its
ability to raise substantial additional financing, to adhere to and adapt its
products to evolving Internet protocols and standards, and market acceptance of
the Internet products and services which are typically subject to a high level
of uncertainty. While the Company has applied for a US patent with claims
related to its planned Web business, there can be no assurances that any claims
will be allowed or, if any claims are allowed, that they will be enforceable or
prevent others from developing a business model similar to the Company's.
Management is working on plans to raise new capital to finance the development
of the interactive Web service. There is, however, no assurance that the Company
will be able to raise additional financing on the terms acceptable to the
Company.
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In the nine months ended December 31, 1999, revenue has increased by 23%
compared to the nine months ended December 31, 1998 while operating expenses
have decreased by 4%. The Company has incurred losses from operations since
inception and had an accumulated deficit of $7,798,351 as at December 31, 1999.
While the cumulative losses were mainly a result of research and development and
start-up expenses exceeding revenues, recent losses stem also from increased
sales promotion, packaging, and marketing expenses and significant increased
general and administrative expenses since June 30 1999 when the Company became a
public company.
As at December 31, 1999, about 43% of the Company's assets of $1,599,780 are
represented by cash and cash equivalents. Management plans to raise new capital
to finance its aggressive sales and marketing plans to promote its current
product lines through Internet channels and to finance development of its
interactive Web service.
RESULTS OF OPERATIONS
For the three-month and nine-month periods ended December 31, 1999
GENERAL
During the quarter ended December 31, 1999, the Company completed its
establishment of a Singapore incorporated subsidiary, Agate Technologies Pte
Ltd. The establishment of this subsidiary in Singapore is an effort to relocate
certain of the Company's R&D activities, technical support, logistics and
shipment activities to a lower cost center.
The Company has concentrated its focus on increasing its bundled products and
ecommerce sales and de-emphasized its revenue source from licensing of its Hot
Swap software to notebook OEMs. This is in part due to the fact that notebook
configurations change constantly as OEMs introduce new models. As a result
supporting these engineering requirements caused the Company to incur
significant engineering overhead costs to maintain this income stream.
The Company's goal is to maintain a high level of technological innovation and
to significantly increase its market reach for its current range of software
solution and products, through a more selective focus via an aggressive
marketing program. During the current quarter, the Company completed the
development of its new software product, HotShadow, that enables one's alternate
or secondary storage device to mirror or "shadow" the contents of one's primary
storage devices on a selective or ongoing basis. This software led to the
introduction of the Disaster Recovery System (DRS) which allows users to recover
almost instantly from a hard disk crash by causing one's secondary storage
device to "take over" in realtime. An aggressive launch of this product is
planned for the next quarter.
The Company is also in the early stage of completing its development of a
hotswap "plug and play" software for the LINUX platform although no assurance
can be given as to when or if such development will be completed.
REVENUE
Revenue was $344,284 in the three months ended December 31, 1999, a decrease of
$75,215 compared to $419,498 in the three months ended December 31, 1998. The
decrease was mainly due to a decline in licensing revenue from its Hot Swap
software sold to notebook OEMs.
For the three months ended December 31, 1999, bundled product sales increased to
$202,229 compared to $182,164 for the three months ended December 31 1998. The
increase in bundled product sales in the current quarter was not sufficient to
offset the decline in licensing revenue, as a result of which, total revenues
declined by 18%. Management expects that bundled products revenues should
improve with the introduction of its new product line, Disaster Recovery
Systems, supported by a more aggressive marketing and promotion campaign.
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<PAGE>
Over the nine-month period ended December 31, 1999, the Company continued to
show an increase in overall revenue to $1,084,807 representing an increase of
23% over the nine month period ended December 31 1998.
GROSS MARGIN
Gross margin achieved in the three months ended December 31, 1999 was 68%, a
slight decrease from 72% achieved in the three months ended December 31, 1998.
This decrease was mainly due to the decrease in the higher margin notebook
licensing and service revenue as a percentage of total revenue.
Gross margins for the nine month periods ended December 31, 1999 and 1998 were
69% and 68% respectively. There were no significant variances in the sales mix
in these periods.
Cost of sales for bundled products consists of cost of materials, inward freight
and packaging. For software products, cost of sales includes software packaging,
documentation and physical media costs.
TOTAL OPERATING EXPENSE
The management constantly reviews and exercises tight control and makes a
conscientious effort to keep operating expenses low. Operating expenses have
decreased both in the three and nine-month periods ended December 31, 1999 as
compared to the nine months ended December 31, 1998. However, excluding the
$133,709 write back of an over accrued expense for discontinued operations taken
previously during the fourth quarter of fiscal 1999, the Company's operating
expenses were relatively constant for the three-month and nine-month periods
ended December 31, 1999, and December 31, 1998.
RESEARCH AND DEVELOPMENT EXPENSE
The Company had gradually decreased its R&D headcount in California while moving
the bulk of its R&D and support activities to Singapore. Accordingly, research
and development expenses decreased in both the three and nine months ended
December 31, 1999 but are expected to increase once the transition phase is over
and the Singapore entity expands its research and development department.
Research and development expenses were $177,832 for the three months ended
December 31, 1998 but decreased to $109,988 in the three months ended December
1999. Research and development expenses also decreased from $642,434 in the nine
months ended December 31, 1998 to $419,502 in the nine months ended December 31,
1999.
SALES AND MARKETING EXPENSE
With the launch of ei Corporation, there was increased sales and marketing
activities. Sales and marketing expenses increased from $299,066 in the three
months ended December 31, 1998 to $387,126 in the three months ended December
31, 1999. Sales and marketing expenses for the nine months ended December 31,
1998, were $780,369 and increased to $908,425 for the nine months ended December
31, 1999.
The Company plans to continue to work through a select network of external sales
representative to complement its lead generation efforts. It is anticipated that
marketing and related expenses will grow as the Company promotes its products
more aggressively through co-operative marketing programs, trade show
participation and select media coverage. There is no assurance, however, that
the Company will generate increased revenues as a result of its increased sales
and marketing efforts. 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 additional financing in
calendar year 2000 to fund the increased sales and marketing efforts thought to
be necessary to generate revenue growth.
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GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense decreased from $256,650 for the three months
ended December 31, 1998 to $ 235,547 for the three months ended December 31,
1999. However, expenses for the nine months ended December 31, 1999 were
$884,004, 25% higher than the $706,628 for the nine months ended December 31,
1998. This increase was mainly due to higher professional (legal, audit and
other) fees resulting from the acquisition of ARCA and the Company's new
reporting requirements as a public company. Professional fees were $356,182 and
$148,965 for the nine months ended December 1999 and 1998 respectively. The
other operating expenses in fact decreased $30,111 as management exercised more
stringent controls over spending.
DISCONTINUED OPERATIONS OF WHOLLY OWNED SUBSIDIARY
For the three month period ended December 31, 1999, the provision which had been
made during fiscal 1999 for expected expenses associated with the closure of the
Malaysian operations, ATI Malaysia Sdn Bhd, was reduced by $113,709133,709. As
of December 31, 1999, the provision amount to meet anticipated obligations is
$104,000.
INTEREST AND OTHER INCOME
Interest and other income consist primarily of interest income earned on cash
and cash equivalents and income received from sublease and fixed asset
disposals.
Interest and other income decreased in both the three and nine month periods
ended December 31, 1999 as compared to the three and nine month periods ended
December 31, 1998, mainly due to lower interest income resulting from a lower
cash balance.
INTEREST AND OTHER EXPENSE
Interest and other expense represent interest expenses and loss from sale of
fixed assets.
Interest and other expense were slightly lower in the three months ended
December 31, 1999 compared to the three months ended December 31, 1998. They
were, however higher, although marginally, in the nine-month period ended
December 1999 compared to the comparative nine-month period ended December 1998.
This increase was primarily a result of increased usage of its credit facilities
with the banks for working capital purposes as well as to set up the new
Singapore subsidiary.
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 December 31, 1999, the Company had cash and cash equivalents amounting to
$686,133 compared to $2,012,603 as at March 31, 1999. The Company used
$1,403,787 in its operating activities in the nine months ended December 31,
1999. The amount used in the same period in 1998 was $1,324,909.
During the nine months ended December 31, 1999, the Company raised $241,002 from
the issue of common stock and invested $15,436 in equipment, and repaid $173,465
and $6,327 in notes payable and capitalized leases respectively.
The above applications, with the net operating losses caused a decline in cash
and cash equivalents by $1,326,470.
The Company has available a revolving line of credit of up to $2,000,000 with
availability based on a borrowing base formula of 100% of deposits pledged to an
affiliate of the lender, 70% of eligible accounts receivable, and 50% of
inventory (capped at $500,000).
Page 12
<PAGE>
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
and somewhat beyond through active cash management and expense reductions. See
Note B above. 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.
RISKS AND 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
During the current quarter, ei Corporation increased its distribution channels
for bundled products. The Company's bundled products are relatively new and
unproven and need substantial marketing funds to create name brand awareness.
There can be no assurance that there is a viable market for these products. The
Company's marketing arms, ei Corporation and Agate Technologies Pte Ltd, are
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, efforts of ei Corporation 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 and
somewhat beyond, 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 the calendar year 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.
Page 13
<PAGE>
PERSONNEL RECRUITMENT
The Company recognizes the difficulty in recruiting and retaining talent but
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 partnership for its desktop
solutions either in the form of joint marketing and distribution or licensing of
its software and ASIC chip while building its own markets and distribution
channels for its newly released products. There can be no assurance that the
Company will be successful in this regard.
TECHNOLOGICAL CHANGE AND MARKET COMPETITION
Competition in the data storage industry continues to be intense. 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
including, for example, DRS product, Web service, and LINUX version of its plug
and play software. These products and services are in varying stages of
development and there can be no assurance that development of these products and
services will be successfully or timely completed.
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
while during the quarter ended December 31, 1999, 230,400 shares 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
illiquidity 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
Page 14
<PAGE>
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 the technology underlying its planned interactive Web
service; 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.
FOREIGN CURRENCY FLUCTUATIONS
As the Company's R&D operations move overseas and its foreign revenues increase,
the Company becomes more vulnerable to exchange rate fluctuations. The Company
may in the future hedge against this risk.
SUPPLY OF PUBLIC STOCK
Currently only 1,000,000 shares are available for trading in the public market
under SEC rules. Eleven and one-half months after the closing date of the ARCA
acquisition, 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.
GENERAL
The Company's business is subject to general economic conditions, interest rate
changes and uninsurable risks.
Page 15
<PAGE>
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 are hereby incorporated by
reference from 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
No current reports on Form 8-K were filed during the quarter covered by this
report.
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: February 11, 2000 /s/ Francis CS Khoo
-----------------------------
By: Francis CS Khoo
Chairman of the Board and CEO
Page 16
<PAGE>
Exhibit 1: Earnings Per Share Schedule
AGATE TECHNOLOGIES, INC.
EARNINGS PER SHARE SCHEDULE - Three months ended December 31, 1999
Calculation of Net Income
<TABLE>
<S> <C>
Net Income (Loss) $ (355,716)
Weighted Average Shares Outstanding 12,932,004
------------
Net Income (Loss) Per Share $ (0.03)
============
</TABLE>
Calculation of Weighted Average Number of Shares
<TABLE>
<CAPTION>
Date Activity Shares Revised Days Total Ratio Weighted
Outstanding Days Average
Number of
Shares O/S
<S> <C> <C> <C> <C> <C> <C> <C>
10/1/99 Balance b/f 12,932,004 12,932,004 184 184 184/184 12,932,004
========== ========== ==== ==========
12/31/99 Balance c/f 12,932,004 12,932,004 184 12,932,004
========== ========== ==== ==========
</TABLE>
Page 17
<PAGE>
Exhibit 1: Earnings Per Share Schedule
AGATE TECHNOLOGIES, INC.
EARNINGS PER SHARE SCHEDULE -
Nine months
ended December 31, 1999
Calculation of Net Income
<TABLE>
<S> <C>
Net Income (Loss) $(1,349,746)
Weighted Average Shares Outstanding 12,170,945
-----------
Net Income (Loss) Per Share $ (0.11)
===========
</TABLE>
Calculation of Weighted Average Number of Shares
<TABLE>
<CAPTION>
Date Activity Shares Revised Days Total Ratio Weighted
Outstanding Days Average
Number of
Shares O/S
<S> <C> <C> <C> <C> <C> <C> <C>
3/31/99 Balance b/f 7,050,000 10,575,000 88 275 88/275 3,384,000
6/28/99 Issued 321,336 482,004
----------- -----------
7,371,336 11,057,004 1 275 1/275 40,207
6/29/99 ARCA transacntion 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 2 275 2/275 94,051
======== ===========
3/31/99 Balance c/f 91 275 3,518,258
======== ===========
7/1/99 Balance b/f 12,932,004 12,932,004 184 275 184/275 8,652,686
=========== =========== ======== ===========
12/31/99 Balance c/f 12,932,004 12,932,004 184 275 8,652,656
=========== =========== ======== ===========
12,932,004 12,932,004 275 275 12,170,945
=========== =========== ======== ===========
</TABLE>
Page 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES FOR THE NINE
MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 686,133
<SECURITIES> 0
<RECEIVABLES> 252,109
<ALLOWANCES> (19,457)
<INVENTORY> 407,274
<CURRENT-ASSETS> 1,375,705
<PP&E> 303,210
<DEPRECIATION> (227,788)
<TOTAL-ASSETS> 1,599,780
<CURRENT-LIABILITIES> 512,867
<BONDS> 0
0
183
<COMMON> 1,293
<OTHER-SE> 56,011
<TOTAL-LIABILITY-AND-EQUITY> 1,599,780
<SALES> 1,084,807
<TOTAL-REVENUES> 1,084,807
<CGS> 339,152
<TOTAL-COSTS> (339,152)
<OTHER-EXPENSES> (2,078,222)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (9,118)
<INCOME-PRETAX> (1,286,505)
<INCOME-TAX> (63,241)
<INCOME-CONTINUING> (1,349,746)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,349,746)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
