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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(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, 1998
( ) 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.
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(Exact name of small business issuer as specified in its charter)
DELAWARE 04-3089539
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 ROBBINS ROAD WESTFORD, MA 01886
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(Address of principal executive offices) (Zip Code)
978-392-8626
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(Registrant's telephone number, including area code)
Transitional Small Business Disclosure Format:
Yes No X
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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 X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
Stock, as of the latest practicable date: As of November 14, 1998, the Company
had 11,898,951 shares of Common Stock, $.01 par value, issued and
outstanding.
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<PAGE>
AUGMENT SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
PAGES
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PART I FINANCIAL INFORMATION
<S> <C>
Item 1 Financial Statements
Balance Sheets as of December 31, 1997
and September 30, 1998 3
Results of Operations for the three and nine months
ended September 30, 1998 and 1997 4
Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 5
Notes to Financial Statements 6-8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 13
Item 2 Changes in Securities 13
Item 3 Defaults Upon Senior Securities 13
Item 4 Submission of Matters to a Vote of Security-Holders 13
Item 5 Other Information 13
Item 6 Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE>
AUGMENT SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
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1998 1997
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(unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash $ 906,197 $ 47,224
Accounts receivable, net 285,750 224,969
Inventories 594,542 1,162,920
Prepaid expenses 159,820 115,100
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Total current assets 1,946,309 1,550,213
Property and equipment, net 252,837 409,848
Other assets 297,495 278,745
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Total assets $ 2,496,641 $ 2,238,806
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 365,996 $ 1,371,632
Accrued expenses 125,780 611,633
Notes payable 1,500,000 717,569
Bridge financing -- 474,074
Current portion of capital lease obligations 42,549 46,177
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Total current liabilities 1,430,545 3,221,085
Convertible promissory notes 20,743 41,495
Capital lease obligations, less current portion 81,951 81,951
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Total liabilities 2,137,019 3,344,531
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Stockholders' Equity (Deficit):
Common stock, $.01 par value; 30,000,000
shares authorized; 11,898,952 and 4,713,319
shares issued and outstanding at September 30, 1998,
and December 31, 1997, respectively 118,990 47,133
Additional paid-in capital 21,487,524 15,286,410
Accumulated deficit (21,246,892) (16,439,268)
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Total stockholders' equity (deficit) 359,622 (1,105,752)
Total Liabilities and Stockholders' Equity $ 2,496,641 $ 2,238,806
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</TABLE>
The accompanying notes are an integral part of the financial statements.
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AUGMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Sales $ 18,056 $ 776,387 $ 824,034 $ 1,343,610
Cost of sales 362,460 325,341 732,215 572,822
------------ ------------ ------------ ------------
Gross margin (344,404) 451,046 91,819 770,788
Operating expenses:
Research and development 538,724 728,409 1,956,190 1,855,329
General and administrative 361,586 1,452,791 1,058,520 2,522,089
Sales and marketing 470,012 651,023 1,676,462 1,893,110
------------ ------------ ------------ ------------
Total cost and expenses $ 1,370,322 $ 2,832,223 $ 4,691,172 $ 6,270,528
------------ ------------ ------------ ------------
Loss from operations $ (1,714,726) $ (2,381,177) $ (4,599,353) $ (5,499,740)
------------ ------------ ------------ ------------
Other expense:
Net interest expense $ (193,744) $ (3,533) $ (219,931) $ (140,369)
------------ ------------ ------------ ------------
Total other expense, net $ (193,744) $ (3,533) $ (219,931) $ (140,369)
------------ ------------ ------------ ------------
Net loss $ (1,908,470) $ (2,377,644) $ (4,819,284) $ (5,640,109)
------------ ------------ ------------ ------------
Net loss per common share (0.16) (0.50) (0.44) (1.47)
Weighted average common and common
equivalent shares outstanding 11,898,952 4,713,319 10,851,138 3,849,583
</TABLE>
The accompanying notes are an integral part of the financial statements.
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AUGMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
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Cash flows from operating activities:
<S> <C> <C>
Net loss $(4,819,284) $(5,640,109)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of fixed assets 8,850
Depreciation and amortization 197,221 128,854
(Increase) decrease in operating assets and liabilities:
Accounts receivable (60,781) (1,164,870)
Inventory 568,378 (508,653)
Capitalized Software -- (265,000)
Other assets (63,470) (124,330)
Accounts payable (1,288,485) 936,946
Accrued expenses (221,528 (36,942)
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Net cash used in operating activities (5,687,949) (6,665,254)
Cash flows from investing activities:
Purchase of property and equipment (40,211) (149,650)
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Net cash used for investing activities (40,211) (149,650)
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Cash flows from financing activities:
Proceeds from issuance of common stock 6,034,566 8,985,240
Proceeds from issuance of short-term promissory notes -- 3,125,000
Proceeds from bridge financing 1,500,000 --
Repayment of bridge financing (200,000) --
Repayment of short-term advance -- (575,000)
Payments on capital lease obligations -- (14,042)
Payments on short-term promissory notes (750,000) (3,826,248)
Payment on long-term convertible promissory notes (20,753) (20,753)
Deferred financing costs -- (1,092,431)
Net cash provided by financing activities $ 6,563,813 $ 6,581,766
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Net increase (decrease) in cash 858,973 (233,138)
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Cash at beginning of period 47,224 452,753
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Cash at end of period 906,197 219,615
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</TABLE>
The accompanying notes are an integral part of the financial statements.
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<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Augment Systems, headquartered in Westford, Massachusetts, develops,
manufactures, markets and services high performance systems that provide digital
infrastructure and workflow solutions for printing and imaging applications. The
Company's products provide a digital infrastructure that accelerates performance
up to 20 times over the performance of current Ethernet networks, manages
workflow and accommodates the technical diversity found in image-intensive
industries. From October 1995 and through March 1997, the Company operated as a
development stage company and engaged principally in the development and
integration of cross platform, high performance file servers with Fibre
Channel-Arbitrated Loop technology. During this time, the Company engaged in
limited marketing activities and did not commence shipments of its initial
products until February 1997. During the second quarter ended June 30, 1997, the
Company commenced commercial shipment of its server product and recognized
initial revenues in April 1997. In 1998, the Company has focused its efforts on
sales and marketing of existing products, new product development and raising
capital to support operations. Since September the Company has been seeking to
identify financing sources to undertake and complete an equity financing of at
least $4,000,000. In November 1998 the Company was informed by a investment bank
that it would not be able to complete a follow-on equity financing. The Company
is currently seeking alternative sources of financing, and no assurance can be
given that the Company will be able to initiate a private placement, or if one
is started, complete a financing to fund ongoing operations, or that such a
financing will be on terms favorable to the Company.
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 Form 10-KSB for
the fiscal year ended December 31, 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-and nine-month periods ended September 30,
1998 or any other interim periods, are not necessarily indicative of the results
to be expected for the full year.
2. NET LOSS PER SHARE OF COMMON STOCK
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, issued by the Financial Accounting
Standards Board. Under SFAS No. 128 the basic and diluted net loss per share of
common stock is computed by dividing the net loss by the weighted average number
of common shares outstanding for the period, including stock options issued at
nominal amounts within 12 months of the Company's Initial Public Offering
("IPO"). The weighted average number of common shares outstanding is summarized
as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
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<S> <C> <C>
Denominator for basic loss per share:
Weighted average common stock shares
outstanding............................................ 10,318,545 2,560,911
Potential dilutive common shares:
Common stock shares issuable under stock
options at nominal amounts within 12
months of IPO........................................ -0- 1,288,672
---------- ----------
Denominator for diluted loss per share........................ 10,851,138 4,699,229
</TABLE>
Stock options issued at nominal amounts within 12 months prior to the
Company's IPO are considered outstanding for all periods presented for the
diluted calculation in accordance with the Securities and Exchange Commission
Staff Accounting Bulletin No. 98. The Company's options, warrants and
convertible debt instruments other than those issued for nominal amounts within
12 months of the Company's IPO are not considered outstanding for the diluted
calculation since their effect is antidilutive.
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<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
3. STOCKHOLDERS' EQUITY
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 pertaining to
periods prior to April 1997 have been adjusted to give effect to this stock
split.
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 certain estimated expenses payable by
the Company were approximately $8,220,000.
In January 1998, the Company had a first closing on a private placement
of 6,180,000 shares of the Company's Common Stock at a price of $1.00 per share.
In addition, the Company issued to the private placement agent as part of the
agent's commission 378,910 shares of the Company's Common Stock, in lieu of cash
compensation. In May 1998, the Company closed on an additional 575,000 shares of
the Company's Common Stock at a price of $1.00 per share and terminated the
private placement. In addition, the Company issued to the private placement
agent as part of the agent's commission 51,722 shares of the Company's Common
Stock, in lieu of cash compensation. The shareholders that participated in the
private placement of 6,755,000 shares in January and May 1998 of the Company's
Common Stock and the placement agent will receive an additional one-half (1/2)
share, or 3,592,816 shares of the Company's Common Stock, should the Company not
meet specific revenue targets by the end of fiscal year 1998. The Company does
not anticipate meeting specific revenue goals for 1998 and has therefore
approved the issuance of the additional shares of Common Stock. In October 1998,
the Company's Board of Directors approved the issuance of 3,592,816 additional
shares of the Company's Common Stock.
On June 29, 1998, the stockholders of the Company approved an increase in
the number of authorized shares of common stock from 30,000,000 to 50,000,000, a
one-for-three reverse stock split of the Company's Common Stock and the issuance
of an additional 10,000,000 shares of Common Stock in connection with a proposed
private placement to be undertaken by the Company. The reverse stock split may
only be effected upon the closing of a private placement of the Company's Common
Stock.
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<PAGE>
4. FINANCING ARRANGEMENTS
In October 1997, the Company entered into a note agreement with Fleet
National Bank in the principal amount of $750,000 with interest at the bank's
prime rate plus 2%. This loan was originally payable by December 31, 1997, or
upon completion of a financing resulting in net proceeds of at least $5,000,000.
In accordance with the original terms of the loan, the Company issued to the
bank warrants to purchase 100,000 shares of the Company's Common Stock at an
exercise price of $3.00 per share exercisable over 5 years. Gross proceeds from
the loan were $750,000. In December 1997, the loan agreement was amended to
extend the due date on the loan to February 28, 1998. In consideration of the
extension, the exercise price of the warrants was reduced from $3.00 per share
to $1.00 per share. The term of this loan was further extended until April 1,
1998 and subsequently to July 31, 1998 pursuant to agreements between the
Company and Fleet National Bank. On July 31, 1998, the Company made a payment in
the amount of $300,000 to Fleet National Bank to partially pay down the loan. At
that time, the bank orally agreed to extend the term of the loan an additional
two weeks until August 15, 1998, pending the completion of a proposed bridge
financing being undertaken by the Company.
In August 1998, the Company entered into a financing arrangement with
an investment bank to secure $1,500,000 in bridge financing of secured
convertible promissory notes and common stock purchase warrants. In September
1998, the Company secured $1,500,000 in bridge financing and used a portion of
the proceeds to repay its indebtedness in full to Fleet National Bank. As a part
of the financing arrangement the Company and the investment bank contemplated
undertaking an equity private placement as a follow-on financing to the bridge
financing. In November 1998 the Company was informed by the investment bank that
it would not be able to complete the follow-on equity financing. The Company is
currently seeking alternative sources of financing, and no assurance can be
given that the Company will be able to initiate a private placement, or if one
is started, complete a financing required to repay the bridge financing, which
is payable in full in September 1999 or upon the closing of $4,000,000 in
financing by the Company, or fund ongoing operations, or that such a financing
will be on terms favorable to the Company.
5. MATERIAL EVENTS
In February 1998, the NASD changed the listing requirements for
companies whose securities are listed on NASDAQ SmallCap Market. In light of
those changes, on February 26, 1998, NASDAQ informed the Company it was to have
net tangible assets of $5,000,000 by June 30, 1998, and granted the Company a
temporary listing exception until that time. Since, at June 30, 1998, the
Company did not meet the net tangible assets requirement, on July 7, 1998 NASDAQ
informed the Company that it's securities were no longer eligible for listing on
the NASDAQ SmallCap Market. The Company's Common Stock is currently listed on
OTC Bulletin Board under the symbol of "AUGS" and the Company's Common Stock
Purchase Warrants are listed under the symbol "AUGWS."
-8-
<PAGE>
AUGMENT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED
TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
INTRODUCTION
Augment Systems, headquartered in Westford, Massachusetts, develops,
manufactures, markets and services high performance systems that provide digital
infrastructure and workflow solutions for printing and imaging applications.
From October 1995 and through March 1997, the Company operated as a development
stage company and engaged principally in the development and integration of
cross platform, high performance file servers with Fibre Channel-Arbitrated Loop
technology, resulting in a new paradigm for storing and transferring large
files. During this time, the Company engaged in limited marketing activities and
did not commence shipments of its initial products until February 1997. During
the second quarter ended June 30, 1997, the Company commenced commercial
shipment of its server product and recognized initial revenues in April 1997.
Since 1996, the Company has been in the forefront of the development of high
performance network and storage solutions using Fibre Channel Storage Area
Network (FC-SAN) technology. The Company's products provide a digital
infrastructure that accelerates performance up to 20 times over the performance
of current Ethernet networks, manages workflow and accommodates the technical
diversity found in image-intensive industries..
RESULTS OF OPERATIONS
The Company recognized product revenues of $18,056 and $824,034 for the three
months and nine months ended September 30, 1998, respectively, as compared to
product revenues of $776,387 and $1,343,610 for the same periods in 1997,
respectively. Gross product margins on product sales were negative and 11% for
the three month and nine months ended September 30 1998, respectively, as
compared to 58% and 57% for the same periods in 1997, respectively. Contributing
to the decrease in margins for the three and nine month periods in 1998, is the
recognition of $100,000 in bad debt expense and approximately $262,000 in
obsolete and excess inventory. The Company anticipates that an additional
$500,000 write-down of excess and obsolete inventory will be recognized during
the fourth quarter as the Company makes a transition to a new product family.
The Company does not anticipate shipping additional product during the fourth
quarter as it is concentrating its efforts on raising additional funds and
development of its next generation product. Prior to the second quarter ended
June 30, 1997, the Company was a development stage company and had not
recognized revenues.
The Company recognized a net loss of $1,908,407 and $4,819,284 for the three and
nine months ended September 30, 1998, respectively, as compared to net losses of
$2,377,644 and $5,640,109 for the same periods in 1997, respectively. The
decreases in net loss of $469,237 and $820,825 for the three and nine month
periods, respectively, is attributable to decrease in operating spending in
sales and marketing expenses and a reduction administrative costs associated
with legal fees, accountants fees and outside consultants fees. The Company
anticipates scaling its operations back considerably to concentrate on
development of its next generation product.
Research and development costs for the three and nine months ended September 30,
1998 were $538,734 and $1,956,190, respectively, as compared to $728,409 and
$1,855,329 for the same periods in 1997, respectively. The $189,675 decrease for
the three month period ended September 30, 1998 is due to a reduction in outside
engineering consulting costs. The $100,861 increase compared to the nine month
period ended September 30, 1997 is primarily due to a increase in engineering
supplies and prototype spending and outside contractors associated with product
development of the Company's server during the last half
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<PAGE>
of 1997 and the first half of 1998. The Company anticipates that research and
development costs will go down as the Company eliminates engineering contractors
and consultants.
General and administrative costs for the three and nine months ended September
30, 1998 were $361,586 and $1,058,520, respectively, as compared to $1,452,791
and $2,522,089 for the same periods in 1997, respectively. The $696,934 and
$1,069,298 decreases for the three and nine month periods, respectively, is
primarily attributable to a reduction in administrative support personnel, and a
reduction in spending for outside legal, accounting and consulting services.
Selling and marketing costs for the three and nine months ended September 30,
1998 were $470,012 and $1,676,462, respectively, as compared to $651,023 and
$1,893,110 for the same periods in 1997, respectively. The $181,011 and $216,648
decreases for the three and nine month periods, respectively is attributable to
an decreases in marketing support and sales personnel in the Far East and Europe
and decreased spending on promotional material. The Company anticipates that
selling and marketing expenses will decrease in the fourth quarter of 1998 as
the Company suspends sales of its existing product line and concentrates its
resources on development of its next generation product.
The Company plans to reduce its staff from its current level of 24 to 12
full-time employees and concentrate efforts on development of its next
generation product and raising additional funds. Additional personnel may be
required depending on the level of business activity and the success of securing
additional funding.
LIQUIDITY AND CAPITAL RESOURCES
Since October 1995, the Company has funded its operations principally from a
combination of debt and equity financings totaling approximately $22,570,000. 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 $8,220,000.
In July 1997, the Company obtained a $3,000,000 working line of credit from
Fleet National Bank. Borrowings on the facility will bear interest at prime plus
.50%. Borrowings are limited to 75% of eligible domestic accounts receivable and
are secured by all assets of the Company. In October 1997, the use of this
facility was temporarily suspended until the Company complies with certain
financial covenants.
In October 1997, the Company obtained a $750,000 loan from Fleet National Bank.
The loan is secured by all of the Company's assets, bears interest at Fleet
National Bank's prime rate plus 2% and was originally payable by December 31,
1997 or upon completion of a financing resulting in net proceeds to the Company
of at least $5,000,000. Pursuant to the original terms of this loan, the Company
issued detachable warrants to purchase 100,000 shares of Common Stock at an
exercise price of $3.00 per share exercisable over five years. This loan was
extended through and until February 28, 1998 and the exercise price for the
warrants issued in conjunction with this loan was lowered from $3.00 per share
to $1.00 per share. The term of this loan was further extended until April 1,
1998 and subsequently to July 31, 1998 pursuant to agreements between the
Company and Fleet National Bank. On July 31, 1998, the Company made a payment in
the amount of $300,000 to Fleet National Bank to partially pay down the loan. At
that time, the bank orally agreed to extend the term of the loan an additional
two weeks until August 15, 1998. In September 1998 upon completion of a bridge
financing undertaken by the Company in August, the Company retired the
outstanding loan with Fleet National Bank.
In December 1997, the Company entered into an agreement with Sunrise Securities
Corp. ("Sunrise Securities"), a New York based investment bank, to raise a
minimum of $6,000,000 and a maximum of $9,000,000 in a private placement of the
Company's Common Stock. During December 1997 and January
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<PAGE>
1998, Sunrise Securities secured $1,000,000 in bridge financing from
institutional and private investors in anticipation of the private placement.
The bridge financing promissory notes accrued interest at 8% per annum with
interest and principal payable at maturity on the initial closing of the private
placement. In addition, the Company issued to the bridge investors five year
warrants to purchase up to 750,000 shares in the aggregate of the Company's
Common Stock at $1.00 per share. In February 1998, the Company repaid $200,000
of these promissory notes plus interest and the holders of $800,000 of these
promissory notes converted their notes into shares of the Company's Common Stock
at $1.00 per share. In January 1998, the Company closed on an initial amount of
$6,180,000 of a private placement initiated in December 1997. In early May 1998,
the Company closed on an additional $575,000 and terminated the offering started
in December 1997.
In August 1998, the Company entered into an agreement with a New York based
investment bank to raise $1,500,000 in bridge financing, of secured convertible
promissory notes and common stock purchase warrants and with a goal to
subsequently raise an additional $4,000,000 to $6,000,000 million in a private
placement of the Company's Common Stock. In September 1998, the Company
completed the $1,500,000 in bridge financing and used a portion of the proceeds
to repay in full its indebtedness to Fleet National Bank. The convertable
promissory notes are due and payable upon the earlier of the closing of a
financing of a minimum of $4,000,000 or in September 1999. In November 1998, the
Company was informed by the investment bank that they would be unable to secure
the additional funding required to repay the outstanding bridge loan and provide
the Company with the necessary working capital to support its business plan. The
Company is seeking alternative financing, however no assurance can be given that
the Company will be able to obtain additional funding on terms favorable to the
Company, if at all. In addition as a result of the investment bank decision, the
Company has suspended sales of its current product and will also seek a buyer or
a strategic partner as an alternative means of funding the Company. If the
Company is unsuccessful in either securing additional financing or finding a
buyer or strategic partner, it will be forced to suspend all operations during
the fourth quarter of 1998. Success of future operations is subject to a number
of risks, including: the risk that the Company will not be successful in
developing future products; the risk of rapid technological changes in the
server industry; the Company's limited operating history, history of losses, and
accumulated deficit; the Company's need for additional capital; the highly
competitive nature of the server industry; and future unanticipated shortfalls
in the Company's revenues.
The Company is dependent on its ability to obtain additional financing to fund
new product development. 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.
The Company does not have any material commitments for capital expenditures at
this time.
YEAR 2000
Certain computer programs and microprocessors use two digits rather than four to
define the applicable year. Any computer program that has date-sensitive
software and microprocessors may recognize a date using "00" and the year 1900
rather than 2000. This phenomenon could cause a disruption of the Company's
operations, including, among other things, a temporary inability to send
invoices, or engage in similar normal business activities. Management believes
the Company is substantially year 2000 compliant with respect to its sales,
administration, and general operations. Prior to purchasing any new equipment or
software, it is Company policy to ensure that the specifications include year
2000 compliance. However, there can be no guarantee that the systems of other
companies on which the Company's system will rely will be converted on a timely
basis, or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material impact on the
Company. Based on its current assessment, management believes that year 2000
compliance will not have a material adverse impact on the future operations of
the Company.
FORWARD LOOKING STATEMENTS
Some of the statements in this Form 10-QSB Quarterly Report, as well as
statements by the Company in periodic press releases, oral statements made by
the Company's officials to analysts and shareholders in the
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course of presentations about the Company and conference calls following
quarterly earnings releases, constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Words or
phrases denoting the anticipated results of future events such as "anticipate,"
"believe," "estimate," "will likely," "are expected to," "will continue,"
"project," "trends" and similar expressions that denote uncertainty are intended
to identify such forward-looking statements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. Such factors affecting future results
include, but are not limited to, the Company's limited operating history, the
Company's need for additional financing, rapid technology changes, regulatory
uncertainty, level of demand for the Company's products and services, product
acceptance, industry wide competitive factors, timing of completion of major
equipment projects, retention of qualified personnel, the Company's dependence
on proprietary technology of other third parties and political, economic or
other conditions. Furthermore, market trends are subject to changes that could
adversely affect future results. Because of these and other factors, past
financial performance is not necessarily indicative of future performance,
historical trends should not be used to anticipate future operating results, and
the trading price of the Company's common stock may be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results
and market conditions.
-12-
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 1998, the Company's former President and CEO, Lorrin
Gale, left the Company at the request of the Board of
Directors. On May 29, 1998, Mr. Gale filed a complaint against
the Company in the Superior Court of the Commonwealth of
Massachusetts seeking relief for breach of an employment
contract. In September 1998, the Company reached a settlement
with Mr. Gale, which required that the Company pay $150,000 in
severance pay and an additional $45,000 in increments of
$15,000 over the next three years commencing in July 1999.
The Company has received a letter from a printing vendor
claiming that the Company owes the vendor approximately
$50,000 for printing services rendered. The Company's position
is that it has provided consideration to the vendor for the
printing services in the form of equipment and software, in
accordance with an understanding between the parties
established in November 1996. The Company has filed a
counterclaim and intends to defend its position vigorously.
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
-13-
<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.
AUGMENT SYSTEMS, INC.
Date: November 14, 1998 By: /s/Laurence Liebson
-------------------
Laurence Liebson
President & Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1998 By: /s/Duane A. Mayo
----------------
Duane A. Mayo
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial & Accounting Officer)
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 906,197
<SECURITIES> 0
<RECEIVABLES> 285,750
<ALLOWANCES> 0
<INVENTORY> 594,542
<CURRENT-ASSETS> 1,946,309
<PP&E> 252,837
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,496,641
<CURRENT-LIABILITIES> 1,430,545
<BONDS> 0
0
0
<COMMON> 118,990
<OTHER-SE> 359,622
<TOTAL-LIABILITY-AND-EQUITY> 2,496,641
<SALES> 824,034
<TOTAL-REVENUES> 824,034
<CGS> 732,215
<TOTAL-COSTS> 4,691,172
<OTHER-EXPENSES> 219,931
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (4,819,284)
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<NET-INCOME> (4,819,284)
<EPS-PRIMARY> (.44)
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