SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 March 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________
Commission file number 0-22341
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AUGMENT SYSTEMS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3089539
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
2 ROBBINS ROAD WESTFORD, MA 01886
--------------------------- -----
(Address of principal executive offices) (Zip Code)
508-392-8626
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Transitional Small Business Disclosure Format:
Yes No X
----------- -----------
Indicate by check mark whether the registrant (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 requirement for the past 90 days. YES NO X
------ -------
Indicate the number of shares outstanding of each of the issuer's classes of
Stock, as of the latest practicable date: As of July 1, 1997,
Class Outstanding at July 1, 1997
----- ---------------------------
Common Stock, $.01 par value per share 4,713,319
AUGMENT SYSTEMS, INC.
INDEX
PAGES
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of March 31, 1997
And December 31, 1996 3
Statements of Operations for the three month
periods ended March 31, 1997 and 1996 4
Statements of Cash Flows for the three month
periods ended March 31, 1997 and 1996 5
Notes to Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-9
PART II 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 and Reports or Form 8-K 10
Signatures 11
2
AUGMENT SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------------- --------------------
(unaudited)
ASSETS
<S> <C> <C>
Current Assets:
Cash................................................. $ 116,761 $ 452,753
Inventories.......................................... 1,327,746 589,351
Prepaid expenses..................................... 112,500 97,500
------------------- --------------------
Total current assets........................... 1,557,007 1,139,604
Property and equipment, net................................ 313,736 348,889
Deferred financing costs, net.............................. 754,992 176,815
Other assets............................................... 13,745 13,745
------------------- --------------------
Total assets................................... $ 2,639,480 $ 1,679,053
=================== ====================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................... $ 1,336,183 $ 601,274
Accrued expenses..................................... 143,165 196,104
Short term promissory notes.......................... 3,036,748 1,051,248
Short term advance................................... - 575,000
Current portion of capital lease obligations......... 19,675 19,013
------------------- --------------------
Total current liabilities...................... 4,535,771 2,442,639
Convertible promissory notes............................... 62,248 62,248
Capital lease obligations, less current portion............ 22,328 27,530
------------------- --------------------
Total liabilities.............................. 4,620,347 2,532,417
------------------- --------------------
Commitments
Stockholders' deficit:
Common stock, $.01 par value; 30,000,000 shares authorized;
2,913,319 and 2,865,512 shares issued and outstanding at
March 31, 1997 and December 31, 1996, respectively 29,133 28,655
Additional paid-in capital........................... 6,638,216 6,177,194
Accumulated Deficit.................................. (8,648,216) (7,059,213)
------------------- --------------------
Total stockholders' deficit.................... (1,980,867) (853,364)
------------------- --------------------
Total liabilities and stockholders' deficit.... $ 2,639,480 $ 1,679,053
=================== ====================
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
AUGMENT SYSTEMS, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
-------------------- --------------------
<S> <C> <C>
Costs and expenses:
Research and development $ 464,047 $ 131,342
General and administrative 489,138 155,174
Sales and marketing 541,687 -
-------------------- --------------------
Total cost and expenses $ 1,494,872 $ 286,516
-------------------- --------------------
Loss from operations $ 1,494,872 $ 286,516
-------------------- --------------------
Other expense:
Net interest expense $ 94,131 $ 15,071
-------------------- --------------------
Total other expense, net $ 94,131 $ 15,071
-------------------- --------------------
Net loss $ 1,589,003 $ 301,587
==================== ====================
-0.55 -0.21
Net loss per common share
Weighted average common and common 2,913,319 1,454,700
equivalent shares outstanding
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
AUGMENT SYSTEMS, INC.
Statements of Cash Flow
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1997 1996
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss (1,589,003) (301,587)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of fixed assets 8,850 -
Depreciation and amortization 40,432 -
(Increase) decrease in operating assets and liabilities:
Prepaid expenses (15,000) -
Inventory (738,395) -
Other assets - (20,000)
Accounts payable 734,909 13,120
Accrued expenses (52,939) 59,077
-------------------- --------------------
Net cash used in operating activities (1,611,146) (249,390)
-------------------- --------------------
Cash flows from investing activities:
Purchase of property and equipment (14,129) (24,521)
-------------------- --------------------
Net cash used for investing activities (14,129) (24,521)
-------------------- --------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 72,000 44,145
Proceeds from issuance of convertible promissory notes - 347,399
Proceeds from issuance of short-term promissory notes 2,375,000 -
Repayment of short-term advance (575,000) -
Payments on capital lease obligations (4,540) -
Payments on promissory notes - (150,000)
Deferred financing costs (578,177) -
-------------------- --------------------
Net cash provided by financing activities 1,289,283 241,544
-------------------- --------------------
Net increase (decrease) in cash (335,992) 32,431
Cash at beginning of period 452,753 242,669
Cash at end of period 116,761 210,302
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
In fiscal year 1996, and for the first three months of 1997, Augment
Systems, Inc. (the "Company"), formerly Augment Systems Incorporated, was a
development stage company which develops and sells high-end super server
products designed to move large image and text files rapidly and efficiently
over computer networks. The Company's initial target markets will be the
electronic publishing industry and the Internet/Intranet market. The Company
plans to introduce in 1997 a Windows NT-based super server targeted to meet the
growing demand for Windows NT-based high performance Internet/Intranet World
Wide Web servers and a super server system designed to support multi-platform
networks comprised of Macintosh, Windows NT and UNIX-based workstations.
The accompanying unaudited financial statements are presented in
accordance with the requirements for Form 10-QSB and do not include all the
disclosures required by generally accepted accounting principles for complete
financial statements. Reference should be made to the Company's Prospectus for
its initial public offering declared effective on May 12, 1997 for additional
disclosures including a summary of the Company's accounting policies.
In the opinion of management of the Company, the financial statements
include all adjustments, consisting of only normal recurring accruals, necessary
for a fair presentation of the financial position of Augment Systems, Inc. The
results of operations for the three months ended March 31, 1997 or any other
interim period, are not necessarily indicative of the results to be expected for
the full year.
2. NET LOSS PER SHARE OF COMMON STOCK
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which the Company is required to adopt for both interim and annual
periods ending after December 15, 1997. SFAS No. 128 simplifies the earnings per
share ("EPS") calculation by replacing primary EPS with basic EPS. Basic EPS is
computed by dividing reported earnings available to common stockholders by
weighted average shares outstanding. Fully diluted EPS, now called diluted EPS,
is still required. Early application is prohibited, although footnote disclosure
of proforma EPS amounts computed is required. Under SFAS 128, proforma basic EPS
and diluted EPS for the three months ended March 31, 1997 would not have changed
from the amount reported. All other EPS amounts for the periods presented remain
the same. Common stock equivalents issued prior to this period have not been
included since their effect would be anti-dilutive.
3. SUBSEQUENT EVENTS
In April 1997, the Board of Directors declared a three-for-four reverse
stock split of the Company's Common Stock. All Common Stock and per share
information discussed in the financial statements and notes have been adjusted
to give effect for this stock split.
In April 1997, the Company issued to Venture Management Consultants,
LLC ("Venture Management"), of which Fred L. Chanowski, a director of the
Company, is a 20% member, a promissory note in the principal amount of $200,000
in consideration for $200,000. The promissory note bears interest at 18% per
annum with interest and principal payable at maturity on May 31, 1998.
6
On May 16, 1997, the Company completed its initial public offering of
1,800,000 shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering, after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company were approximately $8,484,000.
In May 1997, certain warrant holders agreed to the cancellation of
warrants to purchase 235,878 shares of Common Stock issued in connection with
Short Term Promissory Notes issued between November 1996 and February 1997. No
consideration was given in connection with the cancellation of these warrants.
In May 1997, the Company issued to Venture Management a promissory note
in the principal amount of $200,000 in consideration for $200,000. The
promissory note bears interest at 18% per annum with interest and principal
payable at maturity on June 30, 1998.
7
AUGMENT SYSTEMS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS
ENDED MARCH 31, 1996
INTRODUCTION
Since October 1995, the Company had been operating as a development stage
company and had been engaged principally in research and development,
recruitment of personnel and financing activities. The Company had engaged in
limited marketing activities and did not commence shipments of its initial
products, which are high-end Macintosh-based super servers, until February 1997.
To date, the Company has shipped six systems and recognized initial product
revenue in April 1997.
The initial target market for the Company's super server is the electronic
publishing industry, both for the creation and preparation of printed material
(prepress) and for electronic publishing via the Internet/Intranet. Each of
these markets requires the rapid and efficient movement of large image and data
files over networks. During 1997, the Company plans to introduce a Windows
NT-based server targeted to meet the growing demand for high performance Windows
NT-based Internet/Intranet WEB servers. Additionally, the Company plans to
introduce a super server system designed to support a multi-platform network
comprised of Macintosh, Windows NT and UNIX-based workstations.
RESULTS OF OPERATION
During the three month periods ended March 31, 1997 and 1996, respectively, the
Company was operating as a development stage company and as such, did not
recognize any revenues from product sales. The Company did not recognize initial
revenue until April 1997.
The Company recorded a net loss of $1,589,003 for the three month period ended
March 31, 1997, as compared to a net loss of $301,587 for the same period in
1996. The $1,287,416 increase is attributable primarily to an increase in
personnel to support research and development, sales and marketing and
administration. In addition, the Company increased the level of spending to
support engineering development of its server products, to begin a marketing
program consisting of attending trade shows and distributing promotional sales
material and to establish a worldwide sales organization.
Research and development costs for the three month period ended March 31, 1997
were $464,047 as compared to $131,342 for the same period in 1996. The $332,705
increase is attributable primarily to additional engineering personnel and
increased use of consultants associated with the development of the Company's
server product. The Company also increased spending for associated engineering
supplies and prototype materials in the development of its server product. The
Company anticipates that research and development costs will continue to
increase through the balance of 1997 as compared to comparable periods in 1996
These costs are expected to be incurred in connection with the development of
additional products to support the Windows NT and Unix platforms.
General and administrative costs for the three month period ended March 31, 1997
were $489,138 as compared to $155,174 for the same period in 1996. The $333,964
increase is primarily attributable to additional administrative support,
increased spending for outside legal and accounting support and other normal
operating expenses.
Selling and marketing costs for the three month period ended March 31, 1997 were
$541,687. The $541,687 increase is attributable to an increase in marketing
support and sales personnel, participation in various trade shows and increased
spending on sales promotional material. The Company anticipates that selling and
marketing expenses will continue to increase through the balance of 1997 as the
Company develops its sales and distribution channels and expands its marketing
efforts.
8
The Company currently has 46 full-time employees and 12 independent contractors
and plans to hire an additional 50 full time employees in various capacities
over the next 12 months. Additional personnel may be required depending on the
level of business activity. The Company expects, however, to continue its
current practice of utilizing independent consultants on an as-needed basis
rather than exclusively hiring additional full time employees.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since October 1995 principally from a
combination of debt and equity financings totalling approximately $18,280,000.
From October 1995 through April 1996, the Company issued convertible promissory
notes in the aggregate principal amount of approximately $864,000. Approximately
$802,000 of the principal balance of these notes plus accrued interest were
converted into shares of Common Stock in November 1996 at a conversion price of
$4.00 per share. In December 1996 and February 1997, the Company raised gross
proceeds of $3,585,000 in a private placement of promissory notes and common
stock purchase warrants. The promissory notes bear interest at 12% per annum and
are to be repaid from the proceeds of its initial public offering. In addition,
from September 1995 through August 1996, the Company issued 1,653,623 shares of
its Common Stock for approximately $3,372,000 in gross proceeds. In each of
April 1977 and May 1977 the Company issued to Venture Management Consultants,
LLC, of which Fred Chanowski, a director of the Company, is a 20% member, a
promissory note in the principal amount of $200,000 in consideration for
$200,000. The promissory notes both bear interest at 18% per annum with interest
and principal payable at maturity on May 31, 1998 and June 30, 1998,
respectively.
On May 16, 1997, the Company completed its initial public offering of 1,800,000
shares of its Common Stock at a price of $5.50 per share and 2,070,000
Redeemable Common Stock Purchase Warrants at $.15 per warrant. Each Redeemable
Common Stock Purchase Warrant entitles the holder to purchase one share of
Common Stock for $6.60 during the four year period commencing May 12, 1998. The
net proceeds from the Company's initial public offering, after deducting
underwriting discounts and commissions and estimated expenses payable by the
Company were approximately $8,484,000. The net proceeds of the Company's initial
public offering and cash generated from operations, are expected to meet the
Company's funding needs to achieve its objectives and growth strategy for at
least the next 12 months. The Company also plans to seek additional working
capital funding from traditional lines of credit and lease lines from
institutional lenders.
As a result of the Company's recurring losses, the Company's auditors have
expressed substantial doubt about the Company's ability to continue as a going
concern. The accompanying financial statements do not include any adjustments
relating to the recovery and classification of recorded asset amounts or the
amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements that describe the
Company's business prospects. These statements involve risks and uncertainties
including, but not limited to, regulatory uncertainty, level of demand for the
Company's products and services, product acceptance, industry wide competitive
factors, seasonality factors, timing of completion of major equipment projects
and political, economic or other conditions. Furthermore, market trends are
subject to changes which could adversely affect future results.
9
PART 11. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1996 a lawsuit was filed against the Company in
Suffolk Superior Court (Massachusetts) by an executive
recruitment agency alleging a breach of contract and seeking
damages in the amount of $50,000. In connection with the
lawsuit, one of the Company's bank accounts has been attached
in the amount of $50,000 pending the resolution of this
matter.
ITEM 2. CHANGES IN SECURITIES
NONE
ITEM 3. DEFAULTS UPON 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
NONE
10
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.
AUGMENT SYSTEMS, INC.
Date: July 1, 1997 By: /s/Lorrin G. Gale
-----------------
Lorrin G. Gale
President & Chief Executive Officer
(Principal Executive Officer)
Date: July 1, 1997 By: /s/Duane A. Mayo
----------------
Duane A. Mayo
Chief Financial Officer, Treasurer
and Secretary (Principal Financial &
Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 116,761
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,327,746
<CURRENT-ASSETS> 1,557,007
<PP&E> 536,990
<DEPRECIATION> 223,254
<TOTAL-ASSETS> 2,639,480
<CURRENT-LIABILITIES> 4,535,771
<BONDS> 0
0
0
<COMMON> 29,133
<OTHER-SE> (2,010,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,639,480
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 1,494,872
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,131
<INCOME-PRETAX> (1,589,003)
<INCOME-TAX> (1,589,003)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,589,003)
<EPS-PRIMARY> (.55)
<EPS-DILUTED> 0
</TABLE>
