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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.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 04-3089539
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
790 Turnpike Street North Andover, MA 01845
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
978-725-8156
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(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 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 May 11, 1998,
Class Outstanding at May 15, 1999
- -------------------------------------- ---------------------------
Common Stock, $.01 par value per share 11,898,952
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<PAGE>
AUGMENT SYSTEMS, INC.
INDEX
PAGES
-----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets as of December 31, 1998
and March 31, 1999 3
Results of Operations for the three months
ended March 31, 1999 and 1998 4
Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 5
Notes to Financial Statements 6-7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
PART II OTHER INFORMATION
Item 1 Legal Proceedings 11
Item 2 Changes in Securities 11
Item 3 Defaults Upon Senior Securities 11
Item 4 Submission of Matters to a Vote of Security-Holders 11
Item 5 Other Information 11
Item 6 Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
AUGMENT SYSTEMS, INC.
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
------------------------------------
1999 1998
(unaudited) (audited)
-------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 24,709 $ 187,815
Accounts receivable, net of allowance
for doubtful accounts of $331,628 -
Inventory, net of allowance of $326,455 -
Prepaid expenses 1,500 27,936
Assets held for sale 10,000 75,000
----------- --------
Total assets $ 36,209 $ 290,751
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 222,125 $ 377,935
Accrued expenses 105,655 182,012
Bridge financing 1,395,701 1,395,701
Convertible promissory notes 5,339 20,743
Current portion of capital lease obligations 123,301 123,301
-------------- ------------
Total liabilities 1,852,121 2,099,692
Commitments
Stockholders' Equity (deficit):
Common stock, $.01 par value; 30,000,000 shares authorized; 11,898,951
shares issued and outstanding at March 31, 1999, and December 31, 1998,
respectively 118,989 118,989
Additional paid-in capital 21,750,867 21,750,867
Accumulated deficit (23,685,768) (23,678,797)
----------------------------------
Total stockholders' equity (deficit) (1,815,912) (1,808,941)
------------- ------------
Total liabilities and stockholders' equity $ 36,209 $ 290,751
============= ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
AUGMENT SYSTEMS, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
NET SALES $ - $ 475,514
COST OF SALES - 229,399
------------- -----------
GROSS MARGIN - 246,115
OPERATING EXPENSES:
Research and development - 701,713
General and administrative 199,469 228,933
Sales and marketing - 723,679
------------ ------------
Total operating expenses 199,469 1,654,325
------------ ------------
LOSS FROM OPERATIONS (199,469) (1,408,210)
------------ ------------
OTHER INCOME (expense):
Net income (expense) 192,498 (23,943)
---------- ------------
Total other expense, net 192,498 (23,943)
---------- ------------
NET INCOME (loss) $ (6,971) $(1,432,153)
============= ============
NET LOSS PER COMMON SHARE:
Basic $ 0.0006 $ (0.65)
============= =============
Diluted $ 0.0006 $ (0.65)
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
AUGMENT SYSTEMS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31, March 31,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,971) $(1,432,153)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on disposal of fixed assets - -
Depreciation and amortization - 65,740
Changes in operating assets and liabilities:
Accounts receivable - (280,279)
Inventories - 199,075
Prepaid expenses 91,436 1,206
Accounts payable (155,810) (1,054,312)
Accrued expenses (91,761) (309,495)
--------- ---------
Net cash used for operating activities (163,106) (2,810,218)
Cash flows from investing activities:
Capital expenditures - (14,633)
----------- ------------
Net cash provided by (used for)
investing activities - (14,633)
Cash flows from financing activities:
Proceeds from issuance of common stock - 4,951,181
Proceeds from bridge financing - 500,000
Repayment on bridge financing - (200,000)
----------- -----------
Net cash provided by financing activities - 5,251,181
----------- ----------
Net increase (decrease) in cash (163,106) 2,426,330
----------- ----------
Cash at beginning of period 187,815 47,224
----------- ----------
Cash at end of period $ 24,709 $2,473,554
----------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Prior to January 15, 1999, Augment Systems, Inc., (the "Company")
designed, developed and sold fibre channel based network file server systems
designed to increase data transfer and file storage on computer networks. In
September 1998, the Company obtained $1,500,000 in bridge financing of secured
convertible promissory notes and common stock purchase warrants, in anticipation
of private placement of the Company's Common Stock. The Company used a portion
of the proceeds of the bridge financing to repay in full its indebtedness to a
major lending institution. In November 1998, the Company was informed by the
investment bank that provided the bridge financing, 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 implementation
of its business plan and ongoing operations. The Company began to seek
alternative financing, but, was unable to secure the funds or a commitment for
the additional funding necessary to maintain ongoing operations and transition
its products from a proprietary platform to standard hardware and software.
While the Company experienced initial success with the introduction of its
products to customers, long-term viability was dependent in part, on migrating
its technology to standard hardware and software. However, without additional
capital, the Company was unable to complete research and development, maintain a
sales force and requisite administrative support.
On January 15, 1999, the Board of Directors elected to discontinue all
ongoing operations, layoff all but one of its employees, seek buyers for its
technology and inventory and look for a merger partner. The Company has ceased
sales, marketing and distribution of its products. On March 31, 1999, two of the
remaining three members of the Board of Directors resigned to pursue other
interests. As of May 15, 1999, the Company's Chief Financial Officer, and only
active board member, was engaged in the disposition of assets, settlement of
outstanding debts, sale of the Company's technology, and exploration of
potential mergers. There are substantial risks that the Company will not be able
to settle its debts or find a suitable merger transaction. The Company may be
compelled to voluntarily file for bankruptcy or be forced by its creditors into
an involuntarily bankruptcy.
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, 1998 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-month period ended March 31, 1999 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
The Company follows Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings per Share, issued by the Financial Accounting
Standards Board.
6
<PAGE>
AUGMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
3. STOCKHOLDERS' EQUITY
In December 1998, the Board of Directors authorized the issuance of an
additional 3,592,816 shares of Common Stock to 66 accredited investors who
participated in private placements of the Company's Common Stock during January
and May 1998. The issuance of the shares was pursuant to specific terms of the
private placement relating to missing certain revenue milestones. As of May 15,
1999, the Company had not issued those shares.
In December 1998, the Board of Directors authorized the issuance of
warrants to purchase 359,282 shares of Common Stock to the underwriter involved
in private placements of the Company's Common Stock during January 1998 and May
1998. The issuance of the warrants was pursuant to specific terms of the private
placement relating to missing certain revenue milestones. As of May 15, 1999,
the Company had not issued those warrants.
7
<PAGE>
AUGMENT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED
MARCH 30, 1998
INTRODUCTION
Prior to January 15, 1999, Augment Systems, Inc., (the "Company")
designed, developed and sold fibre channel based network file server systems
designed to increase data transfer and file storage on computer networks. In
September 1998, the Company obtained $1,500,000 in bridge financing of secured
convertible promissory notes and common stock purchase warrants, in anticipation
of a private placement of the Company's Common Stock. The Company used a portion
of the proceeds of the bridge financing to repay in full its indebtedness to a
major lending institution. In November 1998, the Company was informed by the
investment bank that provided the bridge financing, 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 implementation
of its business plan and ongoing operations. The Company began to seek
alternative financing, but, was unable to secure the funds or a commitment for
the additional funding necessary to maintain ongoing operations and transition
its products from a proprietary platform to standard hardware and software.
While the Company experienced initial success with the introduction of its
products to customers, long-term viability was dependent in part, on migrating
its technology to standard hardware and software. However, without additional
capital, the Company was unable to complete research and development, maintain a
sales force and requisite administrative support.
On January 15, 1999, the Board of Directors elected to discontinue all
ongoing operations, layoff all but one of its employees, seek buyers for its
technology and inventory and look for a merger partner. The Company has ceased
sales, marketing and distribution of its products. On March 31, 1999, two of the
remaining three members of the Board of Directors resigned to pursue other
interests. As of April 15, 1999, the Company's Chief Financial Officer, and only
active board member, was engaged in the disposition of assets, settlement of
outstanding debts, sale of the Company's technology, and exploration of
potential mergers. There are substantial risks that the Company will not be able
to settle its debts or find a suitable merger transaction. The Company may be
compelled to voluntarily file for bankruptcy or be forced by its creditors into
an involuntarily bankruptcy.
Prior to January 15, 1999, Augment Systems, Inc. designed, developed
and sold fibre channel-based network file server systems designed to increase
data transfer and file storage on computer networks. The Company's products
addressed the increasing demand for the rapid transfer and efficient storage of
very large image and text files within computer networks. The Company's initial
target market was the electronic printing and publishing industry which is
rapidly converting to digital technology, but suffered from critical workflow
bottlenecks due to the very large file sizes of color images which cannot be
efficiently transported over conventional networks. The Company sold fibre
channel-based network file server systems which included (i) one or more
end-to-end high speed fibre channel arbitrated loop ("FC-AL") interfaces; (ii) a
file server, the AFX 410, that performs a central file management function, high
speed large capacity storage, and high speed interconnects to the FC-AL
interfaces; and (iii) PCI cards and software for each client workstation to be
connected to the file server.
RESULTS OF OPERATIONS
During the three month period ended March 31, 1999 the Company recognized no
revenues as compared to $475,514 revenues recognized during the three months
ended March 31, 1998. The Company does not anticipate shipping any product for
the foreseeable future and is concentrating its efforts on the disposition of
assets, settlement of outstanding debts, sale of the Company's technology, and
exploration of potential mergers.
8
<PAGE>
The Company recognized a net loss of approximately $7,000 for the three-month
period ending March 31, 1999 as compared to a loss of $1,432,153 for the
three-month period ended March 31, 1998. The recognition of net income is the
result of settling debts with creditors below the amount recognized at the time
of indebtedness.
Research and development costs for the three-month period ended March 31, 1999
were $0 as compared to the three-month period ended March 31, 1998 of $701,713.
The Company is currently not conducting any research and development activities
and does not anticipate any such efforts in the foreseeable future.
General and administrative costs for the three-month period ended March 31, 1999
were $164,469 as compared to $228,933 for the three-month period ended March 31,
1998. The decrease is a result of a reduction of headcount during the first
quarter of 1999. The Company currently has one employee and expects further
reductions in spending, as the first quarter results include severance pay.
Selling and marketing costs for the three-month period ended March 31, 1999 were
$0 as compared to $723,679 for the three-month period ended March 31, 1998. The
Company is currently not conducting any sales and marketing activities and does
not anticipate any such efforts in the foreseeable future.
The Company currently has 1 full-time employee engaged in the disposition of
assets, settlement of outstanding debts, sale of the Company's technology, and
exploration of potential mergers.
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" as
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
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. In addition, the Company believes that its products are year 2000
compliant and does not anticipate any claims relating thereto.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations since October 1995 principally
from a combination of debt and equity financings totaling approximately
$22,975,000. Prior to May 1997, 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 was
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, bearing interest at 12% per
annum, were 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.
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 October 1997, the Company obtained a $750,000 loan from Fleet
National Bank. The loan was secured by all of the Company's assets, bore
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 terms of the loan, the
Company issued detachable warrants to purchase 100,000 shares of Common Stock at
an exercise price of $1.00 per share exercisable over five years. This loan was
extended through and until July 31, 1998. On July 31, 1998, the Company made a
payment in the amount of $300,000 to Fleet National Bank and the final $450,000
balance was retired on August 31, 1998.
9
<PAGE>
During December 1997 and January 1998, the Company secured $1,000,000
in bridge financing from institutional and private investors in anticipation of
the private placement of the Company's Common Stock. 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 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. The
aforementioned funds were used to repay outstanding accounts payable debts
incurred during 1997 of approximately $1.400,000, repay bridge financing of
approximately $200,000 and bank debt of approximately $300,000, support research
and development expenses of approximately $2,000,000, sales and marketing
expenses of approximately $1,700,000, and $675,000 in administrative and other
expenses.
In September 1998, the Company obtained $1,500,000 in bridge financing
of secured convertible promissory notes and common stock purchase warrants. The
Company used a portion of the proceeds of the bridge financing to repay in full
its indebtedness to Fleet National Bank. The convertible promissory notes were
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 provided the bridge financing, 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 and ongoing operations. The Company began to seek alternative
financing, but , was unable to secure the funds necessary. On January 15, 1999,
the Board of Directors decided to shut down operations, lay-off all but one of
its employees, liquidate assets, seek buyers for the Company's technology and
look for merger partners.
In addition, the Company may also need to raise capital from other
financings. There can be no assurances that the Company will be able to obtain
such additional financings on terms acceptable to the Company or in a timeframe
required by the Company, if at all. In such event, the Company may be required
to materially alter its plans. Any such additional financing may result in
significant dilution to existing stockholders or the issuance of securities with
rights superior to those of the existing shareholders. In the event that the
Company is unable to raise or borrow additional funds, the Company may be forced
into bankruptcy.
In addition, the Company is seeking to be acquired by another entity
with growth potential. If any such entity is located, there can be no assurances
that the Company will be able to obtain such a merger on terms acceptable to the
Company and within an acceptable timeframe required by the Company, if at all.
Any such transaction may result in significant dilution to existing stockholders
or the issuance of securities with rights superior to those of the existing
stockholders. In the event that the Company is unable to consummate such a
transaction, the Company may be forced to file for bankruptcy.
These factors raise substantial doubt about the Company's ability to
continue as a going concern. The Company is dependent on its ability to settle
all debts with creditors, attract purchasers of the Company's technology and
attract potential merger partners, which will undoubtedly result in substantial
dilution to existing shareholders. Although the Company has effectively ceased
operations, there are numerous secured and unsecured creditors who could
commence litigation against the Company.
The Company is authorized to issue up to 50,000,000 shares of its
Common Stock and up to 2,000,000 shares of Preferred Stock. As of April 15,
1999, there were 11,898,952 shares of the Company's Common Stock issued and
outstanding and no Preferred Stock issued and outstanding. The Company is
obligated to issue additional 3,592,816 shares of Common Stock to certain
investors who participated in private placements of the Company's Common Stock
during January 1998 and May 1998. The shares had been authorized for issuance by
the Board of Directors during 1998.
The Company does not have any material commitments for capital expenditures at
this time.
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, 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 and
political, economic or other conditions. Furthermore, market trends are subject
to changes that could adversely affect future results.
10
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
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
--------------------------------
(a) There were no Form 8-Ks filed during the quarter ended
March 31, 1999.
11
<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: May 15, 1999 By: /s/ Duane A. Mayo
-----------------------------------------------
Duane A. Mayo
Chief Financial Officer, Treasurer and Director
(Principal Financial & Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 24,709
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 36,209
<CURRENT-LIABILITIES> 1,852,121
<BONDS> 0
0
0
<COMMON> 118,989
<OTHER-SE> (1,815,912)
<TOTAL-LIABILITY-AND-EQUITY> 36,209
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 199,469
<OTHER-EXPENSES> (192,498)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,971)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,971)
<EPS-BASIC> (0)
<EPS-DILUTED> (0)
</TABLE>
