SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(MarkOne)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended September 30, 1996 or
[_] 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: 0-15086
XYBERNAUT CORPORATION
(Exact Name of registrant as specified in its charter)
Delaware 54-1799851
- ---------------------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
12701 Fair Lakes Circle, Fairfax, VA 22033
------------------------------------------------------
(Address of principal executive offices with zip code)
Registrant's telephone number, including area code: (703) 631-6925
N/A
------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
requirements for the past 90 days.
YES [X] NO [_]
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES [_] NO [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest date.
Class Outstanding at September 30, 1996
----- ---------------------------------
Common stock - $0.01 par value 14,254,359
<PAGE>
INDEX
PAGE
----
COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Conditions 7
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Xybernaut Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30,
December 31, 1996
1995 (unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash $ 508,666 $ 9,044,079
Accounts receivable 90,725 365,687
Inventory 249,950 184,670
Prepaid and other current assets 20,617 270,535
------------ ------------
Total current assets 869,958 9,864,971
Fixed assets
Property & equipment, net of accumulated 88,802 131,809
depreciation of $75,508 and $66,758 respectively
Other assets
Patent costs, net of accumulated 184,565 205,707
amortization of $31,017 and $66,758 respectively
Debenture Issuance Costs 196,542 --
Other 53,671 33,415
------------ ------------
Total other 434,778 239,122
------------ ------------
Total assets $ 1,393,538 $ 10,235,902
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Current license fee $ -- $ 60,000
Notes payable 263,425 86,465
Accounts payable 420,801 450,012
Accrued expenses 224,266 465,674
------------ ------------
Total current liabilities 908,492 1,062,151
Long term liabilities:
Deferred licensing revenue -- 205,000
Notes and loans payable 72,999 83,410
Debentures 1,505,000 --
------------ ------------
Total long term liabilities 1,577,999 288,410
------------ ------------
Total liabilities 2,486,491 1,350,561
Commitments & Contingencies
Stockholders' equity (deficit)
Common Stock
authorized 30,000,000; issued 14,254,359 103,725 103,895
Additional Paid-in capital 2,337,663 15,484,690
Accumulated Deficit (3,534,341) (6,703,244)
------------ ------------
(1,092,933) 8,885,341
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 1,393,538 $ 10,235,902
============ ============
</TABLE>
The accompanying notes are an
integral part of the consolidated
financial statements.
3
<PAGE>
Xybernaut Corporation
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1995 1996 1995 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue
Product sales and leases $ 156,042 $ 326,020 $ 209,461 $ 903,733
Consulting and license 63,738 22,049 82,116 60,683
------------ ------------ ------------ ------------
Total revenues 219,780 348,069 291,577 964,416
Cost of sales 112,741 290,480 171,559 785,193
------------ ------------ ------------ ------------
Gross margin 107,039 57,589 120,018 179,223
Operating expenses:
Sales and marketing 253,016 322,456 401,938 784,185
General and administrative 282,491 692,109 702,454 1,375,302
Research and development 723,659 528,522 955,321 1,226,905
------------ ------------ ------------ ------------
Total operating expenses 1,259,166 1,543,087 2,059,713 3,386,392
------------ ------------ ------------ ------------
Operating margin (1,152,127) (1,485,498) (1,939,695) (3,207,169)
Interest income (expense), net (23) 109,120 (594) 38,266
------------ ------------ ------------ ------------
Net Loss $ (1,152,150) $ (1,376,378) $ (1,940,289) $ (3,168,903)
============ ============ ============ ============
Net Loss per common share and common
equivalent shares outstanding $ (0.10) $ (0.10) $ (0.17) $ (0.25)
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 11,884,194 13,776,754 11,757,307 12,469,139
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE>
Xybernaut Corporation
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (1,940,289) $ (3,168,903)
Adjustment to reconcile net loss to net cash from
(used in) operating activities:
Depreciation and amortization 59,502 203,334
Non cash charges for stock and options
issued for services 848,849 85,037
(Increase) decrease in assets:
Inventories (44,632) 65,280
Accounts receivable (125,507) (274,962)
Other current assets (28,691) (249,918)
Increase in liabilities:
Accounts payable and accrued expenses 320,938 220,618
Deferred licensing revenue -- 265,000
------------ ------------
Net cash used in operating activities (909,830) (2,854,514)
Cash flows from investing activities:
Acquisition of property and equipment, net (3,141) (81,866)
Acquisition of patents and related costs (4,118) (56,883)
Other assets (15,325) 20,256
------------ ------------
Net cash provided by (used in) investing activities (22,584) (118,493)
Cash flows from financing activities:
Proceeds from payment of:
Sale of Stock 560,000 --
Initial Public Offering, gross -- 13,282,500
Debentures -- 1,000,000
Notes and Loans payable 275,571 (166,549)
Initial Public Offering & Debenture Fees -- (2,607,531)
------------ ------------
Net cash provided by financing activities 835,571 11,508,420
------------ ------------
Net increase in cash (96,843) 8,535,413
Cash, beginning of period 124,205 508,666
------------ ------------
Cash, end of period $ 27,362 $ 9,044,179
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE>
XYBERNAUT CORPORATION
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the Company's financial position have been reflected in such financial
statements. Results of operations for the three months and nine months ended
September 30, 1996 are not necessarily indicative of results of operations
expected for the full year. The Company's fiscal year ends December 31.
2. PRINCIPLES OF CONSOLIDATION
The Company's consolidated financial statements include the results
of operations of Tech International of Virginia, Inc. ("Tech Virginia"), a
wholly-owned subsidiary that supplies software and consulting services to the
United States government and others. The consolidated financial statements
contain eliminations for all material transactions between the Company and Tech
Virginia.
3. INCOME TAX
Prior to March 31, 1995 the Company had elected to be subject to
Subchapter S status under the Internal Revenue Code. The Company revoked its
Subchapter S election in February 1995 and is taxed as a C corporation. The
change in the Company's tax status will likely result in the Company recording
current and deferred income taxes. To date, the Company has a history of
operating losses and has not had any taxable income. The Company's financial
statements do not contain a provision for income tax expense due to the
Company's status as a Subchapter S Corporation from its inception through the
revocation of its Subchapter S election. Subject to realization, the Company has
generated net operating losses of approximately $5.3 million that can be used to
offset taxable operating income in the future.
4. LICENSING AGREEMENT
In March 1996, the Company entered into a non-exclusive five-year
licensing agreement with Rockwell International. Pursuant to this agreement, the
Company received an initial payment of $300,000 and the release of the Company
from the obligation to pay Rockwell International $1,395,000 pursuant to a
purchase order between the Company and Rockwell International. The initial
payment of $300,000 has been recorded as deferred licensing revenue and is being
recognized as revenue on a straight-line basis over the five-year term.
6
<PAGE>
5. SALE OF DEBENTURES
On November 16, 1995, the Company sold $1,505,000 principal amount of
7% Convertible Debentures due in 1997 (the "November Debentures") and incurred
fees and expenses of approximately $210,500 therewith. On April 16, 1996, the
Company sold $1,000,000 principal amount of 7% Convertible Debentures due in
1997 (the "April Debentures") and incurred fees and expenses of approximately
$140,000 therewith. Collectively, the November Debentures and the April
Debentures are referred to herein as the "Debentures". The Debentures were
converted into Units (as defined in footnote 6) concurrent with the Company's
Initial Public Offering at the rate of one Unit for every $1.75 of principal and
accrued interest.
6. INITIAL PUBLIC OFFERING
On July 18, 1996, the Company completed its Initial Public Offering
and sold 2,415,000 Units at a price of $5.50 per Unit. Each Unit consisted of
one share of common stock and one warrant to purchase a share of common stock at
a warrant exercise price of $9.00 ("Unit"). Gross proceeds from the sale were
$13,282,500 and net proceeds were $10,825,652. Concurrently with the closing of
the Initial Public Offering, the Company exercised its option to purchase all of
the capital stock of Tech International of Virginia, Inc. for $50,000.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION.
OVERVIEW
The Company was incorporated in Virginia in October 1990 to develop,
manufacture and sell mobile computing systems and commenced active operations in
November 1992 as Computer Products & Services, Inc. In April 1996, the Company
was reincorporated under the laws of the State of Delaware and its name changed
to Xybernaut Corporation. Since commencing operations, the Company has incurred
significant operating losses.
The Company's revenues include sales of the Mobile Assistant(R) and
software and consulting services which relate to the Mobile Assistant(R) and to
other software applications. Cost of sales include the cost of Mobile
Assistant(R) components, direct labor and overhead expense, manuals, diskettes
and duplication, packaging materials, assembly, paper goods and shipping.
Software development costs are expensed as incurred until technological
feasibility is established in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86 (Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed), after which any additional development
costs are capitalized until the software is ready for release. The Company has
expensed all software development costs to date.
The Company purchases numerous parts and components from various
third-party suppliers, which the Company assembles into its products.
7
<PAGE>
Revenues are recognized when products are shipped. The Company's
sales agreements generally do not involve any significant obligations to
customers subsequent to delivery except as provided in separate service or
support agreements. Revenues from future software sales will be recognized at
the time the software program is delivered in accordance with Statement of
Position No. 91-1 of the American Institute of Certified Public Accountants.
Research and development expenses consist primarily of consulting
fees and test components, as well as salaries and related benefits paid to
Company personnel engaged in the research and design of new products. Salaries
paid to the Company's software programmers and fees paid to outside software
development consulting firms for further development and enhancement after
technological feasibility of a product has been established, and related
development expenses, will be capitalized in the future in accordance with SFAS
No. 86.
The Company's consolidated financial statements include the results
of operations of Tech International of Virginia, Inc. ("Tech Virginia"), a
wholly-owned subsidiary that supplies software and consulting services to the
United States government and others. The consolidated financial statements
contain eliminations for all material transactions between the Company and Tech
Virginia.
Certain statements in this Management's Discussion and Analysis (the
"MD&A") are not historical facts or information and certain other statements in
the MD&A are forward looking statements that involve risks and uncertainty,
including, without limitation, the Company's ability to develop, manufacture and
sell Mobile Assistant(R) units and such business risks from time to time may be
detailed in the Company's Securities and Exchange Commission reports.
The following table sets forth items from the Consolidated Statements
of Income as a percentage of revenues:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
9/30/95 9/30/96 9/30/95 9/30/96
---- ---- ---- ----
Revenues 100% 100% 100% 100%
Cost of sales 51 83 59 82
---- ---- ---- ----
Gross margin 49 17 41 18
---- ---- ---- ----
Operating expenses:
Sales and marketing 115 92 138 81
General and administrative 129 199 241 143
Research and development 329 152 327 127
---- ---- ---- ----
Total operating expenses 573 443 706 351
Interest income -- 31 -- 4
---- ---- ---- ----
Net loss (524)% (395)% (665)% (329)%
==== ==== ==== ====
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Revenues. Revenues for the three months ended September 30, 1996 were
$348,069, an increase of $128,289, or 58%, compared to $219,780 for the
corresponding period in 1995. This increase in revenues was primarily the result
of shipments of the Mobile Assistant(R) as well as fees related to licensing
agreements and, to a lesser extent, consulting services. Increased discounts on
shipments of the Mobile Assistant(R) resulted in a reduction of average selling
prices and a corresponding reduction in overall gross margin.
Cost of Goods. The cost of goods sold for the three months ended
September 30, 1996 were $290,480, an increase of $177,739, or 158%, compared to
$112,741 for the corresponding period in 1995. These increases resulted from
increased sales of the Mobile Assistant(R).
Sales and Marketing. Sales and marketing expenses for the three
months ended September 30, 1996 were $322,456, an increase of $69,440, or 27%,
compared to $253,016 for the corresponding period in 1995. This increase
resulted from an increase in personnel, public relations efforts, and related
travel offset by a reduction in consulting services.
General and Administrative. General and administrative expenses for
the three months ended September 30, 1996 were $592,109, an increase of
$309,618, or 110%, compared with $282,491 for the corresponding period in 1995.
This increase is largely due an increase in personnel, travel, legal costs,
public relations and to the amortization of issuance costs related to the
debentures.
Research and Development. Research and development expenses for the
three months ended September 30, 1996 were $528,522, a decrease of $195,137, or
27%, compared with $723,659 for the corresponding period in 1995. Increased
expense for personnel and activity related to development efforts on the
Company's head mounted display and next-generation computer system were offset
by $494,500 of compensation expense related to the issuance of stock to
employees and a consultant during the three months ended September 30, 1995.
Excluding this compensation expense, research and development expenses for the
three months ended September 30, 1996 increased by $299,363, or 131%, from the
corresponding period in 1995.
Interest Income (Expense), Net. Net interest income for the three
months ended September 30, 1996 was $109,120, an increase of $109,143, compared
with ($23) for the corresponding period in 1995. This increase is the result of
interest income from the investment of proceeds from the IPO, plus the reversal
of $25,000 for interest expense that was previously accrued but converted into
stock upon the closing of the Initial Public Offering.
9
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Net Revenues. Net revenues for the first nine months of 1996 were
$964,416, an increase of $672,839, or 231%, compared with $291,577 for the
corresponding period in 1995. This increase in revenues was primarily the result
of increased unit shipments of the Mobile Assistant(R) as well as fees related
to licensing agreements and, to a lesser extent, consulting services. Increased
discounts on shipments of the Mobile Assistant(R) resulted in a reduction of
average selling prices and a corresponding reduction in overall gross margin.
Cost of Goods. The cost of goods sold for the first nine months of
1996 were $785,193, an increase of $613,634, or 358%, compared with $171,559 for
the corresponding periods in 1995. This increase resulted from increased sales
of the Mobile Assistant(R).
Sales and Marketing. Sales and marketing expenses for the first nine
months of 1996 were $784,185, an increase of $382,247, or 95%, compared with
$401,938 for the corresponding period in 1995. This increase for sales and
marketing resulted from an increase in personnel, public relations efforts, and
travel offset by a reduction in consulting services for sales and marketing.
General and Administrative. General and administrative expenses for
the first nine months of 1996 were $1,275,302, an increase of $572,848 or 82%,
compared with $702,454 for the corresponding period in 1995. This increase is
largely due to the amortization of issuance costs related to the Debentures,
public relations consulting, an increase in legal, consulting and travel
expenses.
Research and Development. Research and development expenses for the
first nine months of 1996 were $1,226,905, an increase of $271,584, or 28%,
compared with $955,321 for the corresponding period in 1995. Increased expenses
for personnel and activity related to development efforts on the Company's head
mounted display and next-generation computer system were offset by $494,500 of
compensation expense related to the issuance of stock to employees and a
consultant during the three months ended September 30, 1995. Excluding this
compensation expense, research and development expenses for the nine months
ended September 30, 1996 increased by $766,084, or 166%, from the corresponding
period in 1995.
Interest Income (Expense), Net. Net interest income for the first
nine months of 1996 was $38,266, an increase of $38,860, compared with ($594)
for the corresponding period in 1995. This increase is the result of interest
income from the investment of proceeds from the IPO plus the reversal of $25,000
for interest expense that was previously accrued but converted into stock upon
the closing of the Initial Public Offering, offset by $46,917 in interest costs
related to the Debentures and loans of issuance fees for the Debentures.
10
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
From its inception until the completion of the Initial Public
Offering, the Company has financed its operations through the private sale of
its securities, from vendor credits and by short-term loans from management,
stockholders and others. From October 1994 to August 1995 the Company raised
$1,243,476 from the private sale of shares of common stock at $6.00 per share.
In November 1995, the Company raised $1,505,000 through the private placement of
the November Debentures and in April 1996, the Company raised $1,000,000 through
the private placement of the April Debentures. The Company received $1,201,718
and $2,143,642 from these financings net of offering costs. Placement fees in
respect of the Debentures of $270,500 were carried by the Company as
interest-bearing loans and were repaid from the proceeds of the Initial Public
Offering. On July 18, 1996, the Company completed the Initial Public Offering of
its common stock and realized net proceeds of $10,825,652 after related
expenses.
For the nine months ended September 30, 1996, the Company's operating
activities used cash of $2,854,514 compared to $909,830 for the corresponding
period in 1995. Cash used for investing activities for the nine months ended
September 30, 1996 was $81,866 for the acquisition of property and equipment,
$56,883 related to the maintenance and defense of patents offset by a $20,256
decrease in other assets. The Company's financing activities in the nine months
ending September 30, 1996 primarily consisted of $13,282,500 gross proceeds from
the Initial Public Offering, $1,000,000 proceeds from the issuance of the April
Debentures, $300,000 from the issuance of a license to Rockwell International,
of which $35,000 was taken into revenue the nine months ended September 30,
1996, offset by issuance costs for the Initial Public Offering of $2,607,531. As
a result of the above, cash of $8,535,413 was generated for this nine-month
period.
At September 30, 1996, the Company had no material capital
commitments and working capital of $8,802,820. Notes and loans payable as of
September 30, 1996 was $83,410.
The Company anticipates that its working capital needs and operating
expenses will increase as the Company implements its business plan to expand
production and sales of the Mobile Assistant(R), establishes a full sales and
service function, expands research and development, and develops the support
structure for these activities. The timing of increases in personnel, research
and development expenses, the amount of working capital consumed by operations
and competitive pressures on gross margins will impact the magnitude and timing
of the Company's cash requirements. The proceeds from the Initial Public
Offering are currently expected to be sufficient to meet the Company's working
capital needs and operating expenses until June 1997. To meet working capital
needs thereafter, the Company intends to use funds from operations, to obtain a
bank working capital line of credit, and/or complete additional financings.
However, there can be no assurance that the Company can or will obtain
sufficient funds from operations or a bank working capital line of credit or
additional financings on terms acceptable to the Company.
11
<PAGE>
POSSIBLE NON-CASH FUTURE CHARGE
As a condition of the Initial Public Offering, the representative of
the underwriters ("Representative") required the Company's officers, directors
and certain other stockholders to deposit an aggregate of 1,800,000 shares of
common stock into an escrow account (the "Escrowed Shares"). The Escrowed Shares
will be subject to release to such stockholders in increments over a three-year
period only in the event the Company's gross revenues and earnings (loss) per
share for the 12 month periods ending September 30, 1997, 1998 and 1999 equal or
exceed targets which have been established through negotiations with the
Representative ("Performance Targets"). If the Performance Targets are not met
on any of the relevant 12 month periods (and the price of the common stock has
not met or exceeded the price described below), the Escrowed Shares will be
returned to the Company for each period and canceled. In addition to the
foregoing, all then Escrowed Shares will be released to the stockholders if the
closing price of the common stock as reported on the NASDAQ SmallCap Market
equals or exceeds $11.00 for 25 consecutive trading days or 30 out of 35
consecutive trading days during the period ending September 30, 1999. In the
event any Escrowed Shares held by officers, employees or consultants are
released, the difference between the initial offering price of $5.50 per unit
and the market value of such shares at the time of release will be deemed to be
additional compensation expense to the Company. Assuming the price of common
stock at the time of such release is equal to or greater than that portion of
the offering price of $5.50 per Unit attributable to the common stock, the
release of the Escrowed Shares could result in an earnings charge which would
have the effect of reducing or eliminating any earning per share and could have
a negative effect on the market price for the common stock.
POTENTIAL IMPACT OF NEW MODELS ON NEAR-TERM REVENUES
The Company expects to complete sales of the remaining units of its
current model of the Mobile Assistant(R), which is based on a Cyrix 486
processing chip, prior to December 31, 1996. The Company has developed a new
model of the Mobile Assistant(R) that is based on an AMD 5x86 processor and has
contracted with a third-party vendor for a limited production run scheduled for
delivery in December 1996 and January 1997, for delivery to customers and as
demonstration units. Negotiations are underway with several potential vendors
for high-volume production of this model with initial deliveries expected
starting in the first quarter of the next fiscal year. If deliveries of this new
model are delayed, revenues for the quarters ending December 31, 1996 and March
31, 1997 will be adversely affected.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
XYBERNAUT CORPORATION
BY
/s/ Edward G. Newman
---------------------------------
Edward G. Newman
President and Chief Executive
Officer
/s/ John F. Moynahan
---------------------------------
John F. Moynahan
Vice President and Chief
Financial Officer
13
