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, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 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)
519 Montague Expressway
Milpitas, CA 95035
(Address of principal executive offices)
(408) 956-7950
(Issuer's telephone number)
The Company had 13,257,508 shares of common stock, par value $0.0001 per share
outstanding as of October 25, 2000.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
<PAGE>
INDEX
PART 1. FINANCIAL INFORMATION
ITEM 1A. FINANCIAL STATEMENTS
1) CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2000
(UNAUDITED) AND MARCH 31, 2000.
2) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR
THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30,
2000 AND 1999.
3) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR
THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
4) CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
EQUITY FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000.
5) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
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PART 1. FINANCIAL INFORMATION
<TABLE>
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
September 30, March 31,
2000 2000
--------------------- ---------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 549,788 $ 309,894
Trade accounts receivables, less allowance 388,094 224,578
for doubtful accounts $19,457 (March 31, 2000: $27,999)
Inventory 319,885 360,606
Other current assets and prepaids 64,001 65,377
--------------------- ---------------------
TOTAL CURRENT ASSETS 1,321,768 960,455
0
Restricted cash 240,588 98,719
Property, furniture and equipment, net 99,765 77,348
Other Assets 7,450 7,000
--------------------- ---------------------
TOTAL ASSETS $1,669,571 $1,143,522
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Line of Credit $649,060 $155,000
Accounts payable 224,824 121,388
Accrued liabilities 418,453 333,618
Note Payable, current portion 328,018 1,325
Obligation under capital lease, current portion 38,302 -
--------------------- ---------------------
TOTAL CURRENT LIABILITIES 1,658,657 611,331
Notes Payable , net of current portion 13,734 13,734
STOCKHOLDERS' EQUITY (DEFICIT)
Convertible Preferred Stock, $0.0001 par value
15,000,000 shares authorized,
Issued and outstanding shares: 1,825,000 in
September, 2000 and 2,075,000 in March, 2000 183 183
Liquidation Preference $6,387,500
Common Stock, $0.0001 par value
75,000,000 shares authorized,
Issued and outstanding shares: 13,257,008 in
September, 2000 and 12,932,008 in March, 2000 1,325 1,293
Additional paid in capital 9,164,814 8,918,846
Accumulative foreign currency translation adjustment (82,674) (80,932)
Accumulated deficit (9,086,468) (8,320,933)
--------------------- ---------------------
TOTAL STOCKHOLDER'S EQUITY (DEFICIT) (2,820) 518,457
===================== =====================
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT) $1,669,571 $1,143,522
===================== =====================
</TABLE>
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<TABLE>
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- --------------- --------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 569,412 $ 380,793 $ 832,433 $ 740,524
Cost of sales (372,509) (176,595) (422,496) (228,570)
-------------- --------------- --------------- ---------------
Gross profit 196,903 204,198 409,937 511,954
============== =============== =============== ===============
Operating Expenses
Research and development (117,333) (159,286) (232,910) (309,513)
Sales and marketing (236,719) (258,526) (466,660) (543,639)
General and administrative (252,679) (316,910) (480,373) (618,468)
-------------- --------------- --------------- ---------------
Total operating expenses (606,731) (734,722) (1,179,944) 1,471,620
============== =============== =============== ===============
-------------- --------------- --------------- ---------------
Operating loss (409,828) (530,524) (770,007) (959,666)
============== =============== =============== ===============
Interest and other income 6,507 24,559 31,084 42,319
Interest expense and other expense (77,982) (1,309) (25,002) (6,828)
-------------- --------------- --------------- ---------------
Loss before income taxes (481,303) (507,274) (763,925) (924,175)
============== =============== =============== ===============
Income Taxes (5) (37,714) (1,610) (57,605)
-------------- --------------- --------------- ---------------
Net Loss $ (481,308) $ (544,988) $(765,535) $(981,780)
============== =============== =============== ===============
Net loss per common share - basic and fully diluted $(0.04) $(0.04) $(0.06) $(0.08)
-------------- --------------- --------------- ---------------
Weighted Average Number of Common shares 12,960,932 12,932,004 12,950,828 11,788,335
outstanding
============== =============== =============== ===============
</TABLE>
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<TABLE>
AGATE TECHNOLOGIES, INC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASHFLOW
<CAPTION>
Six months ended
September 30,
-----------------------------------------
2000 1999
----------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(765,535) $(981,780)
Adjustments to reconcile net loss to net
cash used for operating activities
Loss on disposal of property, equipment - 364
Depreciation and amortization 37,278 40,572
Amortization of Deferred Compensation 51,750 -
Non-Cash Bonus Compensation 24,000 -
Issuance of Common Stock for Services 22,499
Changes in assets and liabilities
Accounts receivable (163,516) (73,892)
Inventories 40,721 (14,138)
Prepaid expense and other assets 926 (7,800)
Accounts Payable and accrued liabilities 188,271 12,326
----------------- ------------------
Net cash provided by operating activities (563,606) (1,024,348)
CASH FLOW FROM INVESTING ACTIVITIES
Restricted cash (141,869) 34,074
Acquisition of property and equipment (21,393) (11,678)
Proceeds from sale of property and equipment - 600
----------------- ------------------
Net cash used in investing activities (163,262) 22,996
CASH FLOW FROM FINANCING ACTIVITIES
-
Payment on capitalized lease - (3,878)
Proceeds from long-term debt 494,060 -
Proceeds from note payable - (122,744)
Payment on note payable 326,693 -
-
Proceeds from Issuance of common stock 147,751 241,002
----------------- ------------------
Net Cash provided by financing activities 968,504 114,380
Effect of exchange rate change on cash and cash equivalents (1,742) (4,600)
Net Increase/Decrease in cash and cash equivalents 239,894 (891,572)
----------------- ------------------
Cash and cash equivalent at beginning of period 309,894 2,012,603
----------------- ------------------
Cash and cash equivalent at end of period $ 549,788 $1,121,031
================= ==================
Difference
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for
Interest 25,002 6,828
Income Tax 1,610 57,605
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of property and equipment under capitalized lease 38,302 -
Issuance of common stock in exchange for services 22,449 -
</TABLE>
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<TABLE>
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<CAPTION>
ACCUMULATED TOTAL
CONVERTIBLE ADDITIONAL OTHER STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE COMPREHENSIVE EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME/(LOSS) INCOME/(LOSS) (DEFICIT)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1,
2000 1,825,000 $ 183 12,932,008 $ 1,293 $ 8,918,846 $(8,320,933) $ (80,932) $ 518,457
Net loss for the six
ended September 30,
2000 (765,535) $(765,535) (765,535)
Foreign currency
translation
adjustment (1,742) (1,742) (1,742)
Exercise of stock
options 100,500 $10 $64,490 $65,500
Issuance of common
stock for services 10,000 $ 1 $ 22,499 $22,500
Amortization of
deferred
compensation
expense $51,750 $51,750
Issuance of shares
for cash 214,500 $21 $107,229 $107,250
----------------------------------------------------------------------------------------------------------
Balance at
September 30, 2000 1,825,000 $ 183 13,257,008 $ 1,325 $ 9,164,814 $(9,086,468) $ (82,674) $ (767,277) $ (2,820)
==========================================================================================================
</TABLE>
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AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
AGATE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Unaudited Financial Statements
The consolidated balance sheets as of Sep 30, 2000 and March 31, 2000, the
consolidated statements of operations and cash flow for the three months
and six months ended Sep 30, 2000 and Sep 30, 1999 and the related
information contained in these notes have been prepared by management
without audit. In the opinion of management, all accruals (consisting of
normal recurring accruals) which are necessary for a fair presentation of
financial position and result of operations for such period have been made.
Results for an interim period should not be considered as indicative of
results for a full year. These financial statements should be read in
conjunction with the financial statements and notes thereto contained in
the Company's audited financial statements as of and for the fiscal periods
ended March 31, 2000, included in the Form 10KSB filed by the Company on
July 12, 2000.
2) General
On June 29, 1999, all former shareholders of Agate Technologies Inc., a
California corporation (" 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 restriction,
except each share is convertible into 1.5 ARCA common shares. As a result,
shareholder 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 was considered to
be an acquisition of ARCA by Agate-California (reverse-acquisition).
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 is identical in 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.
3) Basis of Consolidation
As of Sep 30, 2000, the consolidated financial statement accounts reflect
the account of the Parent Company, Agate Technologies Inc., Delaware and
its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in the financial statements.
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Summary of Significant Accounting Policies
The summary of significant accounting policies is included in the notes to the
consolidated financial statements for the years ended March 31, 2000 and which
were audited and appear in the Form 10KSB concurrently filed by the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT
OF OPERATIONS
Forward Looking Statements
The Company is making this statement in order to satisfy the "safe harbor"
provisions contained in the Private Securities Litigation Reform Act of 1995.
This report includes forward-looking statements relating to the business of the
Company. 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 impacting the Company and are subject to uncertainties
and factors relating to the Company's operations and business environment, all
of which are difficult to predict and many of which are beyond the control of
the Company, that could cause actual results of the Company to differ materially
from those matters expressed in or implied by forward-looking statements.
Forward-looking statements are typically indicated by the use of words such as
"will", "expects", "intends", and "believes". Examples of such statements
include management's belief that bundled products sales will increase, the
planned introduction of new products by ei Corporation, and the expectation that
the Company's credit line will continue to provide cash availability. 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. The Company disclaims any duty to update
forward-looking statements, even if they become materially incorrect given
subsequent events.
OVERVIEW
Agate Technologies Inc., a Delaware corporation, is a holding company and
through its subsidiaries is engaged in (1) design and development of software
solutions which enable cross PC platform connectivity, interoperability and
scalability for device/data management (2) marketing and distribution of such
software solutions, hardware, and services and those of third parties. The
Company's business focus and product offerings are designed to provide
"data-ready" , cost effective solutions which offer users in home and corporate
computing environments , easy data accessibility and data mobility.
The Company is currently seeking to broaden its customer base and raise
additional working capital to finance its sales and marketing activities,
continuing product development and other operating expenses. There is, however,
no assurance, that the Company will be successful in obtaining such additional
funding on terms it deems acceptable or at all.
RESULTS OF OPERATIONS
The following discussion is for the three- and six-month periods ended September
30, 2000. The Company's certified public accountants have issued a "going
concern" qualification in their audit opinion that expresses doubt
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about the Company's ability to continue as a going concern. Their doubt is based
upon continuing operating losses and the current deficit in stockholders' equity
and working capital.
The Company is in the process of seeking additional financing but there is no
assurance that such financing will be obtained, or if and when obtained, will be
on terms favorable to the Company and would be adequate to meet the Company's
operating requirements to expand and increase its sales.
During the quarter ended September 30, 2000, the Company focussed on sales
growth and reduced operating expenses as a result of its earlier cost cutting
measures. Management, however, expects, that sales and marketing expenses are
likely to increase in the forthcoming quarters to support anticipated sales
growth.
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999.
Net sales for the quarter period ended September 30, 2000 increased 49% to
$569,412 compared to net sales of $380,793 for the quarter period ended
September 30, 1999. Net sales is comprised of (1) licensing and service revenues
and (2) bundled product sales. This increase was due to sales by ei Corporation
of its USB digital drive products. As a result, bundled product sales accounted
for 83% of total net sales for the quarter period ended September 30, 2000.
Gross margin declined to 35% of total sales compared to 54% for the quarter
ended September 30, 1999, due to this change in revenue mix which led to less
revenue being generated by the higher margin licensing activity. Total operating
expenses for the quarter ended September 30, 2000 were $606,731, a decrease of
17%, compared to total operating expenses of $734,722 for the quarter ended
September 30, 1999.
The largest categories of costs and expenses were general and administrative
expenses of $252,679, sales and marketing expenses of $236,719 and research and
development expenses in the amount of $117,333. These expense categories compare
with $316,910, $258,526 and $159,286 respectively in the quarter ended September
30, 1999. Overall operating expenses decreased owing to a lower head count and
the use of part-time staff to support the Company's operations.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1999.
Net sales for the six months ended September 30, 2000 increased by 12% to
$832,433 compared with $740,524 for the six months ended September 30, 1999. The
net operating loss for the six months ended September 30, 2000 narrowed to
$770,007 compared to a net operating loss of $959,666 for the prior six-month
period ended September 30, 1999, a decrease of $213,659 or 22%. Total operating
expense for the six-month period ended September 30, 2000 was $1,179,944
compared with total operating expenses in the six months ended September 30,1999
of $1,471,620. This was a reduction of $291,676 or 20% . The largest categories
of operating expenses in the six months ended September 30, 2000 were general
and administrative expense in the amount of $480,373; sales and marketing
expense in the amount of $466,660; and research and development expense in the
amount of $232,910. For the six months ended September 30, 1999 these expenses
were $618,468, $543,639 and $309,513 respectively.
The reduction of 20% in operating expenses from the previous six-month period
was as a result of the implementation of cost cutting measures, reduction in
permanent staff headcount which was replaced by part-time staff and the costs
and fees related to the merger transaction which was effected in the prior six
month period ended September 30, 1999.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the six months ended September 30,
2000 was $563,606. This compares to net cash used in operating activities of
$1,024,348 for the six months ended September 30, 1999. Net cash used in
investing activities was $163,262 for the six months ended September 30, 2000.
This compares to net cash provided by investing activities of $22,996 for the
six months ended September 30, 1999. Net cash provided by financing activities
was $968,504 in the six months ended September 30, 2000 compared to $114,380 for
the comparable period ended September 30, 1999. Financing activities for the
quarter ended September 30, 2000 consisted of an increase in bank financing of
$494,060, short term loans from a shareholder and two officers of the Company in
the amount of $326,693 and proceeds from issuance of common stock for $147,751.
The short term notes had the following terms (1) $227,500 for six months
expiring March 25, 2001 at a simple interest rate of 10% per annum (2) $50,000
at a simple interest rate of 10% per annum with repayment due on December 31,
2000 or earlier (3) $50,000 at the simple interest rate of 10% per annum with
repayment due on December 31, 2000 or earlier.
The Company had a working capital deficit (current assets minus current
liabilities) of $336,889 at September 30, 2000 compared to working capital of
$349,124 at September 30, 1999. The reduction in working capital of $686,123
reflects the Company's utilization of its working capital to fund its
operations. As at September 30, 2000, the Company had cash and cash equivalents
on hand of $549,788 and other current assets of $771,980. Current liabilities as
at September 30, 2000, were $1,658,657, of which $649,060 were bank loans and
$328,018 were short term notes payable as described above. The Company had a
line of credit from Chinatrust Bank (USA) in the amount of $800,000 of which
$745,335 had been drawn down leaving a sum of $54,665 potentially remaining
available. The total outstanding bank liabilities consisted of direct
liabilities of $649,060 and contingent liabilities (representing outstanding
letters of credit) of $105,275. This line of credit will expire on April 30,
2001
The Company's cash on hand as of September 30, 2000, would not be adequate to
fund the Company's operations for the fiscal period ending March 31,2001, if the
Company continued to use its cash in operating activities at the same rate as
the quarter period ended September 30, 2000. The Company's several cost cutting
methods, however, are expected to have the effect of somewhat reducing its use
of cash in the third quarter. Management believes that its liquidity and capital
resources are not adequate to support its planned operations at present levels
for an extended period of time and is in the process of seeking additional
equity or debt financing to increase its working capital and fund anticipated
operations. There can be no assurance that the Company will be successful in
obtaining additional financing or that any such additional financing the Company
obtains will be on reasonable terms.
The Company currently does not have any material commitments for capital
expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133 "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133"). SFAS 133 establishes accounting and reporting
standards for derivative instruments embedded in other contracts, and for
hedging activities. The Statement requires that entities recognize
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all derivatives as either assets or liabilities on the balance sheet and measure
these derivatives at fair value. SFAS 133 also specifies a new method of
accounting for hedging transactions, prescribes the type of items and
transactions that may be hedged, and specifies detailed criteria to be met to
qualify for hedge accounting. This Statement as amended is effective for
financial statements for periods beginning after June 15, 2000. The Company does
not expect the adoption of this Statement to have a material impact on its
financial statements.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements" ("SAB
101") which the Company expects to adopt no later than the fourth quarter of
fiscal 2001. SAB 101 provides guidance on revenue recognition issues. The
Company does not expect the adoption of SAB 101 to have a material impact on its
financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 "Accounting for Certain Transactions Involving Stock Compensation, an
interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 will be effective July
1, 2000. This interpretation provides guidance for applying APB Opinion No. 25
"Accounting for Stock Issued to Employees". The Company does not expect the
adoption of FIN 44 to have a material impact on its financial statements.
In March 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue No. 00-02, "Accounting for Web Site
Development Costs" which provides guidance on when to capitalize versus expense
costs incurred to develop a web site. The consensus for web site development
costs is effective July 1, 2000. The Company does not presently expect this
Statement to have a material impact on its financial statements.
RISK AND OTHER FACTORS AFFECTING FUTURE RESULTS:
NEED FOR ADDITIONAL CAPITAL
The Company anticipates that its current cash balance will not be sufficient to
meet the Company's capital requirements through March of 2001. There can be no
assurance that the Company will be able to raise adequate funding to finance its
ongoing operations. The Company is continuing its 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 remainder of fiscal
2001. The Company will need Chinatrust Bank (USA) to renew its credit line or
find another bank which will do so; otherwise the Company will need to raise the
necessary supplemental cash to pay off such credit line when it expires on
March 31, 2001.
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
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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 arm, ei Corporation is 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 above, efforts of ei
Corporation will continue to be constrained by a lack of resources to adequately
promote the bundled products.
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 Shirley Ooi.
Loss of the services of any one of them would be materially detrimental.
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 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
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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. 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 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, outstanding common shares of 12,932,004 are available for trading in
the public market under SEC rules. 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 1,825,000 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.
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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.
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See description in the Company's 10-QSB filing for the first fiscal quarter
ended June 30, 2000.
ITEM 2. CHANGES IN SECURITIES
(c)
(i) The Company incurred an obligation to issue 2,500 shares of
common stock to Wall Street Group in a private placement under
an exemption from registration provided by Section 4(2) as stock
based compensation.
(ii) In September 15, 2000, the Company issued 214,500 shares of
common stock to three individuals in a private placement under
an exemption from registration provided by Rule 506 at $0.50
cents per share.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) (i) Exhibit 10, form of stock purchase agreement used in the
September, 2000, private placement described in Item 2(c)(ii),
is included in this report.
(ii) Exhibit 27, financial data schedule, is included in this
report.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
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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 14, 2000 By:
-------------------------------
Francis CS Khoo
Chairman of the Board and CEO
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