U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2000
Commission File Number: 0-30781
MANGOSOFT, INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 87-0543565
------ ----------
(State or other jurisdiction of (IRS Employer ID. No.)
incorporation or organization)
1500 West Park Drive, Suite 190
WESTBOROUGH, MA 01581
---------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (508) 871-7300
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
COMMON STOCK 26,902,342 SHARES
------------ -----------------
$.001 Par Value (Outstanding on November 13, 2000)
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
ITEM 1--Financial Statements:
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2000 and 1999 .........................3
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2000 and 1999 and
Cumulative For The Period From June 15, 1995
(Inception) to September 30, 2000 ......................................4
Condensed Consolidated Balance Sheets as of September
30, 2000 and December 31, 1999 .........................................5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 and
Cumulative For The Period From June 15, 1995
(Inception) to September 30, 2000 ......................................6
Notes to Condensed Consolidated Financial Statements .....................7
ITEM 2--Management's Discussion and Analysis of
Financial Condition and Results of Operations ...........................11
PART II. OTHER INFORMATION
ITEM 6--Exhibits and Reports on Form 8-K .....................................18
Signatures ...................................................................19
Exhibit Index ................................................................20
2
<PAGE>
PART I. FINANCIAL INFORMATION
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues ............................................................. $ -- $ 27,775
Cost of revenues ..................................................... -- --
------------ ------------
Gross margin ............................................... -- 27,775
Costs and expenses:
Research and development (excluding a stock-based
compensation benefit of $7,814,515, net in 2000 and a stock-
based compensation expense of $4,060,631, net in 1999) .......... 1,569,116 1,274,944
Selling and marketing (excluding a stock-based compensation
benefit of $804,967, net in 2000 and a stock-based
compensation expense of $478,802, net in 1999) ................... 1,181,776 152,076
General and administrative (excluding a stock-based compensation
benefit of $6,691,732, net in 2000 and a stock-based compensation
expense of $4,031,182, net in 1999) .............................. 1,807,926 292,079
Consulting fees to related parties ................................. 6,288 31,595
Stock-based compensation (benefit) expense, net .................... (15,311,214) 8,570,615
------------ ------------
Total operating costs and expenses ......................... (10,746,108) 10,321,309
------------ ------------
Income (loss) from operations ........................................ 10,746,108 (10,293,534)
Interest income ...................................................... 384,101 3,760
Interest expense - related parties (including $3,027,375 related
to a beneficial conversion feature in 1999) ....................... -- (3,099,759)
Other interest expense (including $1,832,625 related to a
beneficial conversion feature in 1999) ............................ (270) (1,881,292)
------------ ------------
Total interest expense ..................................... (270) (4,981,051)
Other income (expense), net .......................................... 611 (5,485)
------------ ------------
Net income (loss) .................................................... 11,130,550 (15,276,310)
Accretion of preferred stock ......................................... -- (471,231)
------------ ------------
Net income (loss) applicable to common stockholders .................. $ 11,130,550 $(15,747,541)
============ ============
Net income (loss) loss per common share:
Basic ....................................................... $ 0.41 $ (2.98)
============ ============
Diluted ..................................................... $ 0.36 $ (2.98)
============ ============
Shares used in computing net income (loss) per share:
Basic ....................................................... 26,887,992 5,288,353
============ ============
Diluted ..................................................... 31,035,443 5,288,353
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE FROM
JUNE 15, 1995
NINE MONTHS ENDED SEPTEMBER 30, (INCEPTION) TO
2000 1999 SEPTEMBER 30, 2000
------ ------ -------------------
<S> <C> <C> <C>
Revenues ................................................................ $ 3,569 $ 35,766 $ 286,182
Cost of revenues ........................................................ -- 363 91,892
------------ ------------ ------------
Gross margin .................................................. 3,569 35,403 194,290
Costs and expenses:
Research and development (excluding a stock-based compen-
sation benefit of $2,856,712, net in 2000, a stock-based
compensation expense of $4,060,631, net in 1999 and a stock-
based compensation expense of $7,229,210 cumulative from
June 15, 1995 (Inception) to September 30, 2000) .................... 4,058,339 3,372,695 27,043,810
Selling and marketing (excluding a stock-based compensation
expense of $97,103, net and $478,802, net in 2000 and 1999,
respectively, and a stock-based compensation expense of
$1,400,436 cumulative from June 15, 1995 (Inception) to
September 30, 2000) ................................................. 1,893,486 211,701 11,392,998
General and administrative (excluding a stock-based compen-
sation benefit of $47,356, net in 2000, a stock-based compen-
sation expense of $4,031,182, net in 1999 and a stock-based
compensation expense of $9,298,084 cumulative from
June 15, 1995 (Inception) to September 30, 2000) .................... 3,658,273 1,611,558 14,236,426
Consulting fees to related parties .................................... 25,288 51,198 737,971
Stock-based compensation (benefit) expense ............................ (2,806,965) 8,570,615 17,927,730
------------ ------------ ------------
Total operating costs and expenses ............................ 6,828,421 13,817,767 (71,338,935)
------------ ------------ ------------
Loss from operations .................................................... (6,824,852) (13,782,364) (71,144,645)
Interest income ......................................................... 783,036 7,031 1,361,654
Interest expense - related parties (including $3,027,375 related
to a beneficial conversion feature in 1999 and cumulative from
June 15, 1995 (Inception) to September 30, 2000) ..................... (9,783) (3,265,868) (3,420,676)
Other interest expense (including $1,832,625 related to a bene-
ficial conversion feature in 1999 and cumulative from
June 15, 1995 (Inception) to September 30, 2000) .................... (441) (1,958,125) (1,887,438)
------------ ------------ ------------
Total interest expense ........................................ (10,224) (5,223,993) (5,308,114)
Other income (expense), net ............................................. 6,889 (6,200) (65,859)
------------ ------------ ------------
Net loss ................................................................ (6,045,151) (19,005,526) (75,156,963)
Accretion of preferred stock ............................................ (9,627,147) (1,884,923) (16,231,171)
------------ ------------ ------------
Net loss applicable to common stockholders .............................. $(15,672,298) $(20,890,449) $(91,388,134)
============ ============ ============
Net loss per common share - basic and diluted............................ $ (0.64) $ (11.15)
============ ============
Shares used in computing basic and diluted net loss per
common share ........................................................ 24,411,792 1,872,956
============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 21,872,502 $ 29,959
Prepaid insurance and current assets ............. 157,506 128,155
------------- -------------
Total current assets ........................ 22,030,008 158,114
PROPERTY AND EQUIPMENT, Net ........................... 925,286 147,889
DEPOSITS AND OTHER ASSETS ............................. 5,943 5,943
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TOTAL ............................................ $ 22,961,237 311,946
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Demand notes payable to related parties ....... $ -- $ 232,500
Other short-term debt ......................... -- 92,904
Accounts payable, including past due amounts .. 1,495,312 1,558,988
Accrued compensation .......................... 393,407 242,191
Other accrued expenses ........................ 540,662 364,734
Accrued expenses to related parties ........... 6,288 712,683
Accrued merger costs .......................... -- 77,893
------------- -------------
Total current liabilities ................... 2,435,669 3,281,893
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Common stock ..................................... 26,896 19,924
Additional paid-in capital ....................... 103,105,880 72,185,728
Deferred compensation ............................ (4,366,801) (2,980,343)
Deficit accumulated during the development stage . (78,240,407) (72,195,256)
------------- -------------
Total stockholders' equity (deficiency) .... 20,525,568 (2,969,947)
------------- -------------
TOTAL ................................................. $ 22,961,237 $ 311,946
============= =============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE FROM
NINE MONTHS ENDED SEPTEMBER 30, JUNE 15, 1995
------------------------------- (INCEPTION) TO
2000 1999 SEPTEMBER 30, 2000
-------- -------- ------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................... $ (6,045,151) $(19,005,526) $(75,156,963)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ....................................... 359,236 82,662 2,410,802
Stock-based compensation ........................................... (2,806,965) 8,570,615 17,927,730
Beneficial conversion feature of 12% convertible notes ............. -- 4,860,000 4,860,000
Accrued interest converted into paid-in capital in connection
with the conversion of the 12% convertible notes ................ -- 377,409 377,409
Loss on disposal of equipment ...................................... -- -- 71,942
(Decrease) increase in cash from:
Prepaid insurance and other current assets ...................... (29,351) (36,413) (21,418)
Accounts payable ................................................ 36,324 108,183 1,595,312
Accrued compensation ............................................ 151,216 144,749 343,407
Other accrued expenses .......................................... 175,928 13,132 590,678
Accrued expenses to related parties ............................. (706,395) 51,198 6,288
Deferred revenue ................................................ -- (19,160) --
------------ ------------ ------------
Net cash used in operating activities ...................... (8,865,158) (4,853,151) (46,994,813)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment ............................. (1,136,633) (57,377) (3,420,779)
Payment of merger costs ............................................. (77,893) (60,002) (276,173)
Deposits and other assets ........................................... -- -- (5,943)
Proceeds from sale of fixed assets .................................. -- -- 12,749
------------ ------------ ------------
Net cash used in investing activities ...................... (1,214,526) (117,379) (3,690,146)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common and preferred stock ........... 32,247,631 3,750,000 66,793,549
Proceeds from issuance of notes to related parties ................. -- 2,032,500 4,232,500
Repayments of notes to related parties ............................. (232,500) -- (232,500)
Proceeds from other debt financings ................................ -- 2,000,000 2,750,000
Repayments of other debt financings ................................ (92,904) (750,000) (886,088)
Purchase of common stock from related party ........................ -- -- (100,000)
------------ ------------ ------------
Net cash provided by financing activities .................. 31,922,227 7,032,500 72,557,461
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS ....................... 21,842,543 2,061,970 21,872,502
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ......................... 29,959 232,637 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD............................... $ 21,872,502 $ 2,294,607 $ 21,872,502
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
<PAGE>
MANGOSOFT, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
MangoSoft, Inc. and subsidiary (a development stage company) ("the
Company") develops advanced software technology to simplify, expand and
integrate networking and pooled use of computer resources. The Company organizes
itself as one segment reporting to the chief operating decision-maker.
The Company is considered to be a development stage company since it has
not generated significant revenues from products that have been
developed-to-date. The Company is subject to a number of risks similar to those
of other companies in an early stage of development. Principal among these risks
are dependencies on key individuals, competition from other substitute products
and larger companies, the successful development and marketing of its products
and the need to obtain adequate additional financing necessary to fund future
operations.
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As shown
in the financial statements during the nine months ended September 30, 2000 and
1999, and cumulative for the period from June 15, 1995 (inception) to September
30, 2000, the Company incurred net losses of $6,045,151, $19,005,526 and
$75,055,764, respectively. These factors, among others, raise substantial doubt
about the Company's ability to continue as a going concern. Based upon the
raising of approximately $32.4 million in proceeds from the sale of common stock
and Convertible Preferred Stock, Series A, subsequent to December 31, 1999 (see
Note 4), management believes that the Company will have sufficient capital to
fund its existing operations for the next twelve (12) months.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern. The Company's continuation
as a going concern is dependent upon its ability to generate sufficient cash
flow to meet its obligations on a timely basis, to comply with the terms of its
financing agreements, to obtain additional financing and ultimately to attain
profitability.
2. PRESENTATION OF INTERIM FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements have
been prepared on the same basis as the audited financial statements. In the
opinion of management, all significant adjustments, which are normal, recurring
in nature and necessary for a fair presentation of the financial position, cash
flows and results of the operations of the Company, have been consistently
recorded. The operating results for the interim periods presented are not
necessarily indicative of expected performance for the entire year. Certain
previously reported amounts have been reclassified to conform to the current
presentation format.
The unaudited information should be read in conjunction with the audited
financial statements of the Company and the notes thereto for the year ended
December 31, 1999 included in the Company's Annual Report on Form 10-KSB filed
with the Securities and Exchange Commission and updated in the Company's
Registration Statement on Form SB-2 filed on July 20, 2000 and amended on
September 27, 2000.
COMPREHENSIVE INCOME - Comprehensive income (loss) was equal to net income
(loss) for each period.
SUPPLEMENTAL CASH FLOW INFORMATION - The following table sets forth certain
supplemental cash flow information for the nine months ended September 30, 2000
and 1999, and cumulative for the period from June 15, 1995 (inception) to
September 30, 2000:
7
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER CUMULATIVE
SEPTEMBER 30, SINCE
2000 1999 INCEPTION
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for interest ........................ $ 10,244 $ 11,102 $ 98,151
NON CASH FINANCING ACTIVITIES
Accretion of preferred stock ................................... 9,627,147 1,884,923 16,231,171
Fair value of warrants issued in connection with the sale of the
convertible preferred stock, Series A ....................... 711,229 -- 711,229
Issuance costs of the common and convertible preferred stock,
Series A .................................................... 279,900 -- 279,900
Conversion of accounts payable into common stock ............... 100,000 -- 190,000
</TABLE>
3. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 and effective for
the fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Management is currently evaluating the effect, if any, SFAS No. 133 will have on
the Company's consolidated financial position and results of operations. The
Company will adopt this accounting standard on January 1, 2001, as required.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenues in financial statements filed with the Securities and
Exchange Commission. Management is currently evaluating the effect, if any, SAB
No. 101 will have on the Company's financial position and results of operations.
The Company will adopt this accounting standard during the fourth quarter of
2000, as required.
4. STOCKHOLDERS' EQUITY (DEFICIENCY)
In March 2000, the Company completed the sale of 2.5 million shares of a
new issuance of Convertible Preferred Stock, Series A, (the "Preferred Stock")
to accredited investors at $4.00 per share. The Preferred Stock was convertible
into common stock (initially at a ratio of one to one) and had a liquidation
preference of $10.0 million. The Preferred Stock would automatically convert to
common stock upon the subsequent sale of an additional $10.0 million of the
Company's securities.
In accordance with Emerging Issues Task Force Abstract No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," the net proceeds from the Series A
financing were allocated between the conversion feature and the preferred stock;
because the fair value of the common stock was significantly in excess of the
conversion price implicit in the Series A stock, the net proceeds were allocated
to the conversion feature. Since the Preferred Stock was immediately convertible
into common stock, an immediate dividend or accretion of $9,050,371 was recorded
from common stockholders' equity to the carrying value of the Preferred Stock.
In April 2000, the Company completed the sale of approximately 4.2 million
shares of common stock to accredited investors at $5.00 per share. Upon
completion of the sale of common stock, the Preferred Stock automatically
converted, in accordance with its terms, into 2.5 million shares of common
stock. The Company completed the sale of approximately 0.3 million additional
shares of common stock at prices ranging from $4.00 to $5.00 per share in May
2000.
8
<PAGE>
The Company received $18.1 million from the sale of the common and
Preferred Stock during the three months ended March 31, 2000 and $14.3 million
during the three months ended June 30, 2000. The $32.4 million in proceeds will
be used for research and development, marketing and general working capital or
such other purposes as the Company may determine from time to time in its
discretion.
Costs incurred in connection with the sale of the common and Preferred
Stock were $991,129, including $711,229 representing the fair value of warrants
issued to the placement agent to purchase 58,975 shares of the common stock at
$4 per share. The fair value of the warrants was calculated using the
Black-Scholes option pricing model, with a risk-free interest rate of 6%, an
expected life of two years, no dividends and a volatility of 150%. Because the
Preferred Stock was immediately convertible into common stock, an immediate
dividend or accretion of $576,776, representing the difference between the
quoted market price of the common stock and the exercise price of the warrants
was recorded from common stockholders equity relating to the warrants.
On May 19, 2000, the Company's stockholders approved an amendment to the
1999 Incentive Compensation Plan, as amended and restated as of May 1, 2000,
increasing the aggregate number of shares which may be issued under the plan
from 3,500,000 to 8,000,000 shares.
5. STOCK-BASED COMPENSATION
The Company accounts for stock options granted to employees in accordance
with Accounting Principles Board Opinion ("APB") No.25, "Accounting for Stock
Issued to Employees." Under APB No. 25, stock options which include stock
appreciation rights ("SARs") are accounted for as a variable plan and
compensation expense is measured at each reporting date based on the difference
between the option exercise price and the market price of the common stock. For
unvested options, compensation expense is recognized over the vesting period;
for vested options, compensation expense is adjusted up or down at each
reporting date based on changes in the market price of the common stock.
During the nine months ended September 30, 2000, a stock-based compensation
benefit of $2,806,965 was recorded. This benefit is due primarily to a
$7,097,387 benefit recognized as a result of the decrease in the Company's
quoted market price as of September 30, 2000 ($6.3125) as compared to past
fiscal periods and the resulting effect on the SARs. This benefit was offset by
$4,290,422 of compensation expense incurred as a result of the Company's
issuance of stock options to employees at an exercise price less than the quoted
market price at the grant date. Based on the number of vested options at
September 30, 2000, a $1.00 increase (decrease) in the market price of the
Company's common stock results in the immediate recognition of stock-based
compensation expense (benefit) of approximately $2,600,000.
During the three months ended September 30, 2000, a stock-based
compensation benefit of $15,311,214 was recorded. This benefit is due primarily
to a $15,734,643 benefit recognized as a result of the decrease in the Company's
quoted market price as of September 30, 2000 ($6.3125) as compared to June 30,
2000 ($12.625), and its effect on the SARs. This benefit was offset by $423,429
of compensation expense incurred as a result of the Company's issuance of stock
options to employees at an exercise price less than the quoted market price at
the grant date.
6. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per common share reflects
the potential dilution as if common equivalent shares outstanding were exercised
and/or converted into common stock unless the effect of such equivalent shares
was antidilutive.
9
<PAGE>
A reconciliation of net income (loss) per common share and the weighted
average shares used calculations for the periods indicated is as follows:
<TABLE>
<CAPTION>
NET INCOME (LOSS)
APPLICABLE TO
COMMON
STOCKHOLDERS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Three Months Ended September 30, 2000
Basic .......................... $ 11,130,550 26,887,992 $ 0.41
============
Effect of warrants ............. 156,866 --
Effect of SARs ................. 2,542,586 (0.03)
Effect of stock options ........ 1,447,999 (0.02)
---------- ------
Diluted ........................ $ 11,130,550 31,035,443 $ 0.36
============ ========== ======
Three Months Ended September 30, 1999
Basic .......................... $(15,747,541) 5,288,353 $(2.98)
============
Common stock equivalents ....... -- --
---------- ------
Diluted ........................ $(15,747,541) 5,288,353 $(2.98)
============ ========== ======
Nine Months Ended September 30, 2000
Basic .......................... $(15,672,298) 24,411,792 $(0.64)
============
Effect of warrants ............. -- --
Effect of SARs ................. -- --
Effect of stock options ........ -- --
---------- ------
Diluted ........................ $(15,672,298) 24,411,792 $(0.64)
============ ========== ======
Nine Months Ended September 30, 1999
Basic .......................... $(20,890,449) 1,872,956 $(11.15)
============
Common stock equivalents ....... -- --
---------- ------
Diluted ........................ $(20,890,449) 1,872,956 $(11.15)
============ ========== ======
</TABLE>
All outstanding options and warrants to purchase common stock were included
in the computation of diluted net income per common share for the three-month
period ended September 30, 2000. All outstanding options and warrants to
purchase common stock were excluded from the computation of diluted net loss per
common share for the nine-month period ended September 30, 2000 and 1999 and the
three-month period ended September 30, 1999, as their inclusion would have been
antidilutive.
7. TRANSACTIONS WITH STOCKHOLDERS
DEMAND NOTES PAYABLE - In March 2000, the Company repaid the $232,500 in
demand notes payable to related parties, plus the related accrued interest
expense of $9,783.
ADMINISTRATIVE SERVICES - During 2000 and 1999, a stockholder provided
administrative assistance to the Company. Amounts expensed and accrued for such
services in the three months ended September 30, 2000 and 1999 were $6,288 and
$31,595, respectively. Amounts expensed and accrued for such services in the
nine months ended September 30, 2000 and 1999 were $25,288 and $51,198,
respectively
In March 2000, the Company repaid $712,683 in accrued expenses to related
parties for administrative services provided to the Company during 1998 and
1999.
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
This Quarterly Report on Form 10-QSB, including the following discussions,
contains trend analysis and other forward-looking statements within the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Any
statements in this Quarterly Report that are not statements of historical facts
are forward-looking statements, which involve risks and uncertainties. Our
actual results may differ materially from those indicated in the forward-looking
statements as a result of the factors set forth elsewhere in this Quarterly
Report on Form 10-QSB, including under "Cautionary Statements." You should read
the following discussion and analysis together with our condensed consolidated
financial statements for the periods specified and the related notes included
herein. Further reference should be made to our Annual Report on Form 10-KSB for
the period ended December 31, 1999 (as amended on September 14, 2000) and our
Form 8-K filed with the Securities and Exchange Commission on September 21, 1999
(as amended on October 27, 1999 and August 31, 2000).
We develop and market advanced software technology to simplify, expand and
integrate networking and pooled use of computer resources. We are considered to
be a development stage company since we have not generated significant revenues
from the products that have been developed-to-date. We are subject to a number
of risks similar to those of other companies in an early stage of development.
Principal among these risks are dependencies on key individuals, competition
from other substitute products and larger companies, the successful development
and marketing of our products and the need to obtain adequate additional
financing necessary to fund future operations.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
We did not recognize any revenues for the three-month period ended
September 30, 2000 compared with $27,775 for the comparable period in 1999. The
decrease was attributable to declining sales of our Medley product. A single
customer, Hitachi, Ltd., represented 89% of our revenues for the three months
ended September 30, 1999. No other customer represented 10% or more of our
revenues in either period.
On July 5, 2000, we executed a Manufacturer's Representative Agreement with
Marketlink Technologies, LLC ("Marketlink"), under which Marketlink agreed to
act as designated selling agent for our Cachelink software product. Marketlink
is a national manufacturer's representative organization specializing in the
sales of technology products. Marketlink began marketing Cachelink 3.0 Pro in
September 2000. On July 14, 2000, we executed a Value Added Reseller Agreement
with 3Com Corporation ("3Com"), under which we agreed to license Cachelink 3.0
Pro to 3Com for use in 3Com's Office Connect(R) LAN Modem product line. We did
not receive any revenues under the Marketlink or the 3Com agreement for the
three months ended September 30, 2000.
Operating expenses, including research and development, selling and
marketing, general and administrative and consulting fees paid to related
parties, but excluding stock-based compensation, increased 161% to $4,565,106
for the three-month period ended September 30, 2000 compared to $1,750,694 for
the comparable period in 1999. The increase is primarily attributable to costs
associated with the on-going development of our Mangomind service, an increase
the number of employees and the expansion of our marketing, sales and support
activities for the Mangomind service and Cachelink product. A summary of our
operating expenses for the three months ended September 30, 2000 as compared to
the same period in 1999 is as follows:
11
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, INCREASE (DECREASE)
-------------------------------- -------------------
2000 1999 $ AMOUNT
---- ---- --------
<S> <C> <C> <C>
Research and development (excluding a
stock-based compensation benefit of
$7,814,515, net in 2000 and a stock-based
compensation expense of $4,060,631, net
in 1999) ................................ $ 1,569,116 $ 1,274,944 $ 294,172
Selling and marketing (excluding a stock-
based compensation benefit of $804,976,
net in 2000 and a stock-based compen-
sation expense of $478,802, net in
1999) ................................... 1,181,776 152,076 1,029,700
General and administrative (excluding a
stock-based compensation benefit of
$6,691,732, net in 2000 and a stock-based
compensation expense of $4,031,182, net
in 1999) ................................ 1,807,926 292,079 1,515,847
Consulting fees paid to related party ...... 6,288 31,595 (25,307)
------------ ------------ ------------
4,565,106 1,750,694 2,814,412
Stock-based compensation benefit, net ...... (15,311,214) 8,570,615 (23,881,829)
------------ ------------ ------------
Operating expenses, net ............. $(10,746,108) $ 10,321,309 $(21,067,417)
============ ============ ============
</TABLE>
The stock-based compensation benefit of $15,311,214 during the three months
ended June 30, 2000 relates primarily to stock appreciation rights ("SARs")
granted in tandem with certain employee stock options. A net benefit was
recorded for the three-month period ended September 30, 2000 due to a decrease
in the quoted market price of our common stock from $12.625 per share at June
30, 2000 to $6.3125 per share at September 30, 2000. The entire $8,570,615 in
stock-based compensation expense for the three months ended September 30, 1999
was recorded due to the increase in the quoted market price of the common stock
from the grant date to September 30, 1999.
Income from was $10,746,108 for the three-month period ended September 30,
2000 compared with a loss from operations of $10,293,534 for the comparable
period in 1999 as a result of the above factors.
Interest income increased $380,341 to $384,101 for the three months ended
September 30, 2000 compared to $3,760 for the three months ended September 30,
1999. The increase is attributable to interest earned on the investment of the
proceeds we received from the sale of our common stock and the Convertible
Preferred Stock, Series A in March and April 2000.
Interest expense decreased $4,980,781 to $270 for the three months ended
September 30, 2000 compared to $4,981,051 for the three months ended June 30,
1999. Included in the 1999 interest expense was $4,860,000 in interest expense
recognized as a result of a beneficial conversion feature on our February 1999
issuance of 12% convertible notes. In conjunction with our September 7, 1999
merger with First American Clock Co., the terms of these notes were changed,
which provided for a beneficial conversion to all note holders. The remainder of
the decrease was attributable to the conversion of our debt into common stock in
conjunction with our merger in September 1999.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue was $3,569 in for the nine-month period ended September 30, 2000
compared with $35,766 for the comparable period in 1999. The decrease was
attributable to declining sales of our Medley product. Customers representing
10% or more of our revenues for the nine months ended June 30, 2000 were IPEX
Information Technology Group and Ramp Networks, Inc. (approximately 32% and 17%,
respectively). A single customer, Hitachi, Ltd., represented 70% of our revenues
for the nine months ended September 30, 1999. No other customer represented 10%
or more of our revenues in either period.
Cost of revenue in 1999 represented disk replication costs. In 2000, our
software products were delivered via the Internet and we therefore incurred no
disk replication costs.
12
<PAGE>
Operating expenses, including research and development, selling and
marketing, general and administrative and consulting fees paid to related
parties, but excluding stock-based compensation, increased 84% to $9,635,386 for
the nine-month period ended September 30, 2000 compared to $5,247,152 for the
comparable period in 1999. The increase is primarily attributable to costs
associated with the on-going development of our Mangomind service, an increase
the number of employees and the expansion of our marketing, sales and support
activities for the Mangomind service and Cachelink product. A summary of our
operating expenses for the nine months ended September 30, 2000 as compared to
the same period in 1999 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, INCREASE (DECREASE)
------------------------------- -------------------
2000 1999 $ AMOUNT
---- ---- --------
<S> <C> <C> <C>
Research and development (excluding a
stock-based compensation benefit of
$2,856,712, net in 2000 and a stock-based
compensation expense of $4,060,631, net
in 1999) ................................ $ 4,058,339 $ 3,372,695 $ 685,644
Selling and marketing (excluding a stock-
based compensation expense of $97,103
and $478,802, net, in 2000 and 1999,
respectively) ........................... 1,893,486 211,701 1,681,785
General and administrative (excluding a
stock-based compensation benefit of
$47,356, net in 2000 and a stock-based
compensation expense of $4,031,182, net
in 1999) ............................... 3,658,273 1,611,558 2,046,715
Consulting fees paid to related party ..... 25,288 51,198 (25,910)
------------ ------------ ------------
9,635,386 5,247,152 4,388,234
Stock-based compensation expense .......... (2,806,965) 8,570,615 (11,377,580)
------------ ------------ ------------
Total operating expenses ........... $ 6,828,421 $ 13,817,767 $ (6,989,346)
============ ============ ============
</TABLE>
The stock-based compensation benefit of $2,806,965 during the nine months
ended September 30, 2000 relates primarily to stock appreciation rights ("SARs")
granted in tandem with certain employee stock options. A net benefit was
recorded for the nine-month period ended September 30, 2000 due to a decrease in
the quoted market price of our common stock from $9.75 per share at December 31,
1999 to $6.3125 per share at September 30, 2000. The entire $8,570,615 in
stock-based compensation expense for the nine months ended September 30, 1999
was recorded due to the increase in the quoted market price of the common stock
from the grant date to September 30, 1999
The loss from operations decreased $6,957,512, or 51%, to $6,824,852 for
the nine-month period ended September 30, 2000 compared with a loss from
operations of $13,782,364 for the comparable period in 1999 as a result of the
above factors.
Interest income increased $776,005 to $783,036 for the nine months ended
September 30, 2000 compared to $7,031 for the nine months ended September 30,
1999. The increase is attributable to interest earned on the investment of the
proceeds we received from the sale of our common stock and the Convertible
Preferred Stock, Series A in March and April 2000.
Interest expense decreased $5,213,769 to $10,224 for the nine months ended
September 30, 2000 compared to $5,223,993 for the nine months ended September
30, 1999. Included in the 1999 interest expense balance was $4,860,000 in
interest expense recognized as a result of a beneficial conversion feature on
our February 1999 issuance of 12% convertible notes. In conjunction with our
September 7, 1999 merger with First American Clock Co., the terms of these notes
were changed, which provided for a beneficial conversion to all note holders.
The remainder of the decrease was attributable to the conversion of our debt
into common stock in conjunction with our merger in September 1999.
13
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
We were formed in June 1995 and, since our formation, have raised
approximately $74.2 million as of September 30, 2000 through the private
placement of debt and equity securities.
In addition, we have, at times, depended upon bank debt, loans from
stockholders and Directors and credit from suppliers to meet interim financing
needs. We incurred $750,000 of bank debt in 1998 to purchase capital equipment,
which was subsequently repaid using proceeds we received from issuance of the
12% Senior Secondary Secured Convertible Notes in 1999. Borrowings from
stockholders and Directors have generally been refinanced with new debt
instruments or converted into additional equity. At September 30, 2000,
approximately $1.9 million in additional financing was provided through accounts
payable, accrued expenses and other trade credit.
The proceeds we raised through the private placement of debt and equity
securities have been used in the development of our current products with
approximately $27.0 million invested in research and development and
approximately $14.2 million in sales and marketing, principally due to an
earlier attempt to distribute our products through traditional retail software
channels. The remaining proceeds have been used for working capital and general
corporate purposes.
To date, product sales have provided a minor source of liquidity. From
inception through September 30, 2000, we have generated approximately $0.3
million in sales and incurred cumulative net losses of approximately $75.1
million, including net losses of $6.0 million in the nine months ended September
30, 2000 and $33.0 million during the year ended December 31, 1999. We expect to
incur additional operating losses and expect cumulative losses to increase
substantially as we expand our marketing, sales and research and development
efforts. In July 2000, we entered into agreements with Marketlink and 3Com.
Marketlink has agreed to act as designated selling agent for our Cachelink
software product. Under the terms of our Value Added Reseller Agreement with
3Com, we agreed to license Cachelink 3.0 Pro to 3Com for use in 3Com's Office
Connect(R) LAN Modem product line. We have not received any revenues under these
agreements for the three months ended September 30, 2000.
The auditors' opinion on our financial statements for the fiscal years
ended December 31, 1999 and 1998 includes a going concern explanatory paragraph,
which highlights the uncertainty of our ability to continue our operations.
Unless we can generate a significant level of on-going revenue and attain
adequate profitability in the near-term, we will need to seek additional sources
of equity or debt financing. Although we have been successful in raising past
financing, there can be no assurance that any additional financing will be
available to us on commercially reasonable terms, or at all. Any inability to
obtain additional financing when needed will have a material adverse effect,
requiring us to significantly curtail or possibly cease our operations. In
addition, any additional equity financing may involve substantial dilution to
the interests of our then existing shareholders.
We received approximately $32.4 million from the sale of common stock and
Preferred Stock (see below) in 2000. The $32.4 million in proceeds has been
designated for research and development, marketing and general working capital
or such other purposes we may determine from time to time in our discretion.
Costs incurred in connection with the sale of our common and Preferred Stock
were approximately $1.0 million, including $0.7 million representing the fair
value of warrants issued to the placement agent to purchase 58,975 shares of
stock at $4.00 per share. As of September 30, 2000, there remained $21.9 million
of the proceeds we raised in 2000.
Under the terms of the Preferred Stock issuance, the Preferred Stock
automatically converted into common stock on a one-for-one basis in April 2000
when $10.0 million or greater was raised in the subsequent sale of our common
stock. The offer and sale of our common and Preferred Stock were exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) of the
Securities Act or Regulation D promulgated thereunder. Management believes the
remaining $21.9 million in proceeds from the sale of our common and Preferred
Stock will be adequate to fund our existing operations for at least the next
twelve (12) months.
14
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 and effective for
the fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Management is currently evaluating the effect, if any, SFAS No. 133 will have on
our consolidated financial position and results of operations. We will adopt
this accounting standard on January 1, 2001, as required.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenues in financial statements filed with the Securities and
Exchange Commission. Management is currently evaluating the effect, if any, SAB
No. 101 will have on our financial position and results of operations. We will
adopt this accounting standard during the fourth quarter of 2000, as required.
CAUTIONARY STATEMENTS
An investment in our common stock is highly speculative and subject to a
high degree of risk. You may lose money by investing in our common stock so only
persons who can bear the risk of the entire loss of their investment should
invest. Prospective investors should carefully consider the following factors in
deciding whether to invest in our common stock.
WE HAVE A LIMITED OPERATING HISTORY AND SUBSTANTIAL CUMULATIVE OPERATING LOSSES.
Our current operations substantially commenced in May 1997. Accordingly,
our prospects should be evaluated based on the expenses and operating results
typically experienced by any early stage business. We have a history of
substantial operating losses and an accumulated deficit of approximately $78.2
million as of September 30, 2000. For the fiscal years ended December 31, 1999
and 1998, our losses from operations were $27.8 million and $13.1 million,
respectively. For the nine months ended September 30, 2000, our loss from
operations was $6.8 million. We have historically experienced cash flow
difficulties primarily because our expenses have exceeded our revenues. We
expect to incur additional operating losses and expect cumulative losses to
increase substantially as we expand our marketing, sales and research and
development efforts. The auditors' opinion on our financial statements for the
fiscal years ended December 31, 1999 and 1998 includes a going concern
explanatory paragraph, which highlights the uncertainty of our ability to
continue our operations. If we are unable to generate sufficient revenue from
our operations to pay expenses or we are unable to obtain additional financing
on commercially reasonable terms, our business, financial condition and results
of operations will be materially and adversely affected.
OUR PERFORMANCE DEPENDS ON MARKET ACCEPTANCE OF OUR PRODUCTS.
We expect to derive a substantial portion of our future revenues from the
sales of Cachelink and Mangomind, neither of which has been previously marketed.
If markets for our products fail to develop, develop more slowly than expected
or are subject to substantial competition, our business, financial condition and
results of operations will be materially and adversely affected.
We entered into agreements with Marketlink and 3Com in July 2000. Both
agreements pertain to our Cachelink 3.0 Pro software product. To date, we have
not generated any significant revenues under these agreements. We can provide no
assurances that these agreements will generate significant revenues in the
future.
WE HAVE A MULTI-FACETED MARKET STRATEGY.
We expect our future marketing efforts will focus on developing business
relationships with technology companies that seek to augment their businesses by
offering our products to their customers. In addition, we expect to develop an
internal sales and marketing team. Our inability to recruit and retain qualified
sales and marketing personnel and our inability to enter into and retain
strategic relationships, or the inability of such technology companies to
effectively market our products, could materially and adversely affect our
business, operating results and financial condition.
15
<PAGE>
WE WILL NEED ADDITIONAL FINANCING.
We will require substantial additional capital to finance our growth and
product development. We can provide no assurances that we will obtain additional
financing sufficient to meet our future needs on commercially reasonable terms
or otherwise. If we are unable to obtain the necessary financing, our business,
operating results and financial condition will be materially and adversely
affected.
THERE MAY BE LIMITED LIQUIDITY IN OUR COMMON STOCK AND ITS PRICE MAY BE SUBJECT
TO FLUCTUATION.
Our common stock is currently traded on the OTC Bulletin Board and there is
no established market for the common stock. We applied to have our common stock
listed on the Nasdaq Stock Market. Our application is pending. We can provide no
assurances that we will be able to have our common stock listed on an exchange
or quoted on the Nasdaq Stock market or that it will continue to be quoted on
the OTC Bulletin Board. If there is no trading market, the market price of our
common stock will be materially and adversely affected. In addition,
approximately 25.3 million of the Company's outstanding shares of common stock
are not freely tradable as of September 30, 2000. If the shares are listed on an
exchange or quoted on the Nasdaq Stock Market and a large number of shares of
common stock are sold by the shareholders, the market price of the common stock
may be materially and adversely affected.
RAPIDLY CHANGING TECHNOLOGY AND SUBSTANTIAL COMPETITION MAY ADVERSELY AFFECT OUR
BUSINESS.
Our business is subject to rapid changes in technology. We can provide no
assurances that research and development by competitors will not render our
technology obsolete or uncompetitive. We compete with a number of computer
hardware and software design companies that have technologies and products
similar to those offered by us and have greater resources, including more
extensive research and development, marketing and capital than us. We can
provide no assurances that we will be successful in marketing our existing
products and developing and marketing new products in such a manner as to be
effective against such competition. If our technology is rendered obsolete or we
are unable to compete effectively, our business, operating results and financial
condition will be materially and adversely affected.
LITIGATION CONCERNING INTELLECTUAL PROPERTY COULD ADVERSELY AFFECT OUR BUSINESS.
We rely on a combination of trade secrets, copyright and trademark law,
contractual provisions, confidentiality agreements and certain technology and
security measures to protect our trademarks, patents, proprietary technology and
know-how. However, we can provide no assurances that our rights in our
intellectual property will not be infringed upon by competitors or that
competitors will not similarly make claims against us for infringement. If we
are required to be involved in litigation involving intellectual property
rights, our business, operating results and financial condition will be
materially and adversely affected.
OUR SUCCESS DEPENDS ON KEY PERSONNEL.
Our success is dependent upon the efforts of our senior management
including: Dale Vincent, President and Chief Executive Officer; Donald A.
Gaubatz, Senior Vice President and Chief Operating Officer; Scott H. Davis, Vice
President and Chief Technology Officer; Daniel J. Dietterich, Vice President,
Research; Robert E. Parsons, Vice President and Chief Financial Officer; Robert
J. Primmer, Vice President, Marketing; Peter Caparso, Vice President, Business
Development; James McCarthy, Vice President, Sales; and Thomas Teixeira, Vice
President, Engineering. The loss of Mr. Vincent, Mr. Gaubatz, Mr. Davis,
Mr. Dietterich, Mr. Parsons, Mr. Primmer, Mr. Caparso, Mr. McCarthy or
Mr. Teixeira could have a material and adverse affect on our business. In
addition, competition for qualified personnel in the computer software industry
is intense, and we can provide no assurances that we will be able to retain
existing personnel or attract and retain additional qualified personnel
necessary for the development of our business. Our inability to attract and
retain such personnel would have a material and adverse effect on our business,
financial condition and results of operations.
16
<PAGE>
DEFECTS IN OUR SOFTWARE PRODUCTS MAY ADVERSELY AFFECT OUR BUSINESS.
Complex software such as the software developed by us may contain defects
when introduced and also when updates and new versions are released. Our
introduction of software with defects or quality problems may result in adverse
publicity, product returns, reduced orders, uncollectible or delayed accounts
receivable, product redevelopment costs, loss of or delay in market acceptance
of our products or claims by customers or others against us. Such problems or
claims may have a material and adverse effect on our business, financial
condition and results of operations.
NO DIVIDENDS
We intend to retain any future earnings to finance our operations and do
not intend to pay dividends.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
11. Computation of Net Income (Loss) Per Common Share
27. Financial Data Schedule
(b) Reports on Form 8-K
On August 31, 2000, the Company filed Amendment No. 3 to its 8-K,
originally filed on September 21, 1999 and first amended on October
27, 1999.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
November 14, 2000 MANGOSOFT, INC.
/s/ Robert E. Parsons
--------------------------------------
Robert E. Parsons
Chief Financial Officer
(Principal Financial and Accounting Officer)
19
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
11. Computation of Net Income (Loss) Per Common Share
27. Financial Data Schedule
20
