<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X Quarterly report pursuant to Section 13 or 15(d) of the
-- Securities Exchange Act of 1934 for the quarterly period ended June
30,1997 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 of incorporation) (I.R.S. Employer
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
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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
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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 AUGUST 11, 1997
Common stock - $0.01 par value 14,259,112
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INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
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 12
SIGNATURES 13
</TABLE>
2
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XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31,
ASSETS (UNAUDITED) 1996
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,492,390 $ 6,274,967
Accounts receivable 430,128 427,790
Inventories 698,173 402,381
Prepaid and other current assets 382,022 197,711
----------- -----------
Total current assets 5,002,713 7,302,849
----------- -----------
Fixed assets:
Property and equipment, net of accumulated
depreciation of $243,249 in 1997
and $126,139 in 1996 513,680 323,828
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Other assets:
Patent costs, net of accumulated amortization
of $123,522 in 1997 and $82,588 in 1996 362,567 247,612
Tooling costs 391,033 106,738
Other 38,345 33,547
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Total other assets 791,945 387,897
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Total assets $ 6,308,338 $ 8,014,574
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable $ 217,003 $ 7,849
Accounts payable 426,620 250,944
Deferred licensing revenue 60,000 60,000
Accrued expenses 321,693 571,742
----------- -----------
Total current liabilities 1,025,316 890,535
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Long-term liabilities:
Notes and loans payable 1,002 44,080
Deferred licensing revenue 160,000 190,000
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Total long-term liabilities 161,002 234,080
----------- -----------
Total liabilities 1,186,318 1,124,615
----------- -----------
Commitments and contingencies
Stockholders' equity:
Series A preferred stock 30
Common stock, $.01 par value 142,591 142,591
Authorized: 30,000,000 shares,
Issued: 14,259,112 shares
Additional paid-in capital 18,433,205 15,520,245
Accumulated deficit (13,453,806) (8,772,877)
----------- -----------
Total stockholders' equity 5,122,020 6,889,959
----------- -----------
Total liabilities and stockholders' equity $ 6,308,338 $ 8,014,574
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
3
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XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Product sales and leases $ 125,032 $ 277,825 $ 220,458 $ 577,713
Consulting and license 15,000 16,600 30,000 38,634
----------- ----------- ----------- -----------
Total revenue 140,032 294,425 250,458 616,347
Cost of sales 258,229 264,424 409,790 494,713
----------- ----------- ----------- -----------
Gross margin (118,197) 30,001 (159,332) 121,634
Operating expenses:
Sales and marketing 729,655 315,557 1,489,195 461,729
General and administrative 893,803 379,258 1,885,214 683,193
Research and development 564,398 397,120 1,196,319 698,383
----------- ----------- ----------- -----------
Total operating expenses 2,187,856 1,091,935 4,570,728 1,843,305
----------- ----------- ----------- -----------
Operating loss (2,306,053) (1,061,934) (4,730,060) (1,721,671)
Interest income (expense), net 7,773 (41,683) 49,129 (70,854)
----------- ----------- ----------- -----------
Net loss $(2,298,280) $(1,103,617) $(4,680,931) $(1,792,525)
=========== =========== =========== ===========
Net loss per common share outstanding $ (0.18) $ (0.09) $ (0.38) $ (0.15)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 12,459,112 11,812,680 12,459,112 11,808,148
=========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
4
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XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,680,931) $ (1,792,525)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 160,547 157,090
Noncash charges for stock and options
issued for services 125,488 81,437
(Increase) decrease in assets:
Inventories (295,792) 143,428
Accounts receivable (2,338) (272,846)
Prepaid and other current assets (184,312) (10,619)
Other assets (4,798) 24,373
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (74,373) 660,884
Deferred licensing revenue (30,000) 280,000
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Net cash used in operating activities (4,986,509) (728,778)
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Cash flows from investing activities:
Acquisition of property and equipment (306,962) (6,977)
Acquisition of patents and related costs (155,888) (23,556)
Capitalization of tooling costs (284,294) -
------------ -------------
Net cash used in investing activities (747,144) (30,533)
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Cash flows from financing activities:
Proceeds from:
Series A Preferred Stock 2,785,000 -
Issuance of debentures - 880,000
Loan of placement fees - 120,000
Payments for:
Notes payable (48,924) 13,524
Deferred placement fees 215,000 -
Deferred offering costs - (694,766)
------------ -------------
Net cash used in financing activities 2,951,076 318,758
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Net decrease in cash and cash equivalents (2,782,577) (440,553)
Cash and cash equivalents, beginning of period 6,274,967 508,666
------------ -------------
Cash and cash equivalents, end of period $ 3,492,390 $ 68,113
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
5
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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 have
been reflected in such financial statements. Results of operations for the six
months ended June 30, 1997 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 consolidated financial statements include the accounts of Xybernaut
Corporation ("the Company") and its wholly-owned subsidiary, Tech International
of Virginia Inc. ("Tech Virginia"). All material intercompany accounts and
transactions have been eliminated.
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 has revoked its
Subchapter S election and is taxed as a C corporation. To date, the Company has
a history of operating losses and has not had any taxable income. Subject to
realization, the Company has generated net operating losses of approximately
$11.8 million that can be used to offset taxable operating income in the
future. The Company's future operations, if profitable, will be subject to
income tax expense not previously incurred by the Company once all net
operating losses are utilized to offset taxable operating income.
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
was granted a price reduction of $1,395,000 related to a purchase order issued
in 1995 and received an initial cash payment of $300,000 that was recorded as
deferred licensing revenue and is being recognized as revenue on a
straight-line basis over the five year term. Revenue of $50,000 related to this
licensing agreement was recognized for the year ended December 31, 1996.
6
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
OVERVIEW
The Company was originally incorporated in Virginia in October 1990 as
Contemporary Products & Services, Inc. and changed its name to Computer
Products & Services, Inc. ("CPSI") in 1992. In April 1996, CPSI was merged with
Xybernaut Corporation to change the Company name and reincorporate in Delaware.
Since the commencement of operations in November 1992, the Company has been
engaged in the research, development and commercialization of hardware,
software and services for body-worn computer applications. Since commencing
operations, the Company has incurred significant operating losses.
The first product to be commercialized by the Company is the proprietary
portable computer technology and related software applications embodied in its
Mobile Assistant(R) series. The first product in this series was introduced in
1994 and uses "486" based technology ("486 System"): this product was produced
in a limited quantity and is no longer being manufactured. Company management
expects that continued improvements in software for operating systems,
applications and speech recognition software will require continued
improvements in the performance and capabilities of the Mobile Assistant
series. Based on that expectation, the Company has undertaken a product
development program that resulted in the second product offering in the Mobile
Assistant series, which was introduced on a preproduction basis in January 1997
and which uses "586" based technology ("586 System"). The third system in this
product development program is scheduled for introduction during the third
quarter of 1997 and uses Pentium(R) based technology ("Pentium System"). It is
anticipated that these two new systems will address different segments of the
market for wearable computers. The 586 Series has a lower selling price than
the 486 or Pentium Systems and is well suited for use as "thin clients" in
wireless LANs and for those customers using speech recognition systems with
discrete dictation technology. The Pentium System is tailored for those
customers who require additional processing capacity for their applications,
such as a body-worn server for wireless LAN applications, and also for those
customers using new continuous speech recognition or phonetic recognition
software that require higher processing speeds, such as that available from IBM
Corporation, Dragon Systems, Inc. or Texas Instruments, among others.
Additional software products are being developed and are planned for
development for use on the Mobile Assistant and other personal computers. In
the third quarter of 1997, the Company plans to introduce LinkAssist(TM), which
is a software product that provides a "windows" style graphical user interface
with speech navigation that allows data stored in almost any format, such as
commonly-used word processing, spreadsheet, data base, graphics or media files,
to be linked to most any application without altering the original data.
The Company's revenues include sales of the Mobile Assistant, license fees,
software, and consulting services which relate to the Mobile Assistant and to
other software applications. Cost of sales include the cost of Mobile Assistant
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. No software development
costs have been capitalized to date.
The Company purchases numerous parts and components from various
third-party suppliers, which the Company assembles into its products.
Product sales are recorded on shipment pursuant to a valid customer
purchase order. For equipment shipped under equipment rental or leasing
agreements, revenue is recognized on a straight-line basis over the term of the
rental or lease agreement. Consulting revenue is recognized as the services are
performed pursuant to a written agreement with the client. The Company
generally provides a 90 day warranty on parts and labor and a one year warranty
on parts. The Company's suppliers for the computing unit and the head mounted
display provide the Company with similar warranties and as a result warranty
reserves are immaterial. 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.
7
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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
Xybernaut employees 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 for Tech Virginia, a wholly-owned subsidiary that supplies software
and consulting services to the United States government and others. The
consolidated financial statements eliminate all material intercompany accounts
and transactions between the Company and Tech Virginia.
The following table sets forth items from the Consolidated Statements of
Income as a percentage of revenues:
<TABLE>
<CAPTION>
Unaudited
----------------------------------------
Three Months Ended Six Months Ended
------------------ -----------------
6/30/97 6/30/96 6/30/97 6/30/96
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<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 184.4% 89.8% 163.6% 80.3%
------ ----- ------ -----
Gross margin (84.4)% 10.2% (63.6)% 19.7%
Operating expenses:
Sales & marketing 521.1% 107.2% 594.6% 74.9%
General & administrative 638.3% 128.8% 752.7% 110.8%
Research & development 403.0% 134.9% 477.7% 113.3%
------ ------ ------ ------
Total operating expense 1,562.4% 370.9% 1824.9% 299.1%
Interest income/(expense) 5.6% (14.2)% 19.6% (11.5)%
---- ------ ----- ------
Net loss (1,641.3)% (374.8)% (1,868.9)% (290.8)%
========= ======= ========= =======
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Revenues for the three months ended June 30, 1997 were $140,032,
a decrease of $154,393, or 52.4%, compared to $294,425 for the corresponding
period in 1996. Product sales for the three months ended June 30, 1997 were
entirely of preproduction 586 Systems while product sales for the corresponding
period in 1996 were entirely of the previous-generation 486 Systems. The
reduction in revenues for the three months ended June 30, 1997 was related to
the limited number of preproduction 586 Systems that were offered for sale
during that period.
Cost of Sales. The cost of goods sold for the three months ended June 30,
1997 was $258,229, a decrease of $6,195, or 2.3%, compared to $264,424 for the
corresponding period in 1996. The cost of goods sold decreased commensurately
with the decrease in sales but were offset by approximately $97,000 of parts
for 586 Systems that were replaced and written off, and by a full reserve for
obsolescence of approximately $120,000 for the remaining computing units used
in 486 Systems that are believed by Company management to be saleable, but
whose value is uncertain given changes in technology and advances in the
market.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 1997 were $729,655, an increase of $414,098, or 131.2%, compared
to $315,557 for the corresponding period in 1996. This increase resulted from
an increase in personnel and infrastructure, the expansion of marketing
activities to Europe and Asia, the development of training programs for
Value-Added Resellers ("VARs"), customer service, additional marketing programs
to support the launch of new products, public relations efforts and related
travel.
8
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General and Administrative. General and administrative expenses for the
three months ended June 30, 1997 were $893,803, an increase of $514,545, or
135.7%, compared with $379,258 for the corresponding period in 1996. This
increase resulted primarily from an increase in personnel, consulting, and
travel expenses related to the expansion and continued development of the
Company's infrastructure, the implementation of certain strategic partnerships,
and international operations, along with increases in legal, accounting and
other costs associated with being a publicly held company.
Research and Development. Research and development expenses for the three
months ended June 30, 1997 were $564,398, an increase of $167,278, or 42.1%,
compared with $397,120 for the corresponding period in 1996. This increase is
the primarily the result of increased research and development personnel, the
use of outside consultants, and the planning and development efforts for the
Company's head mounted display, 586 System, Pentium System and software,
particularly for the Link Assist(TM) software.
Interest Income (Expense), Net. Net interest income for the three months
ended June 30, 1997 was $7,773, an increase of $49,456 compared with ($41,683)
for the corresponding period in 1996. This increase is the result of interest
income from the investment of cash balances in 1997 versus interest expense on
convertible debentures and other borrowings in 1996.
Net loss. As a result of the factors described above, the net loss for the
three months ended June 30, 1997 was $2,298,280, an increase of $1,194,663, or
108.2%, compared to a net loss of $1,103,617 for the three months ended June
30, 1996.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Revenues for the six months ended June 30, 1997 were $250,458, a
decrease of $365,889, or 59.4%, compared to $616,347 for the six months ended
June 30, 1996. Product sales for the six months ended June 30, 1997 were
primarily of preproduction 586 Systems while product sales for the
corresponding period in 1996 were entirely of the previous-generation 486
Systems. The reduction in revenues for the six months ended June 30, 1997 was
related to the limited number of preproduction 586 Systems that were offered
for sale during that period.
Cost of Sales. The cost of goods sold for the six months ended June 30,
1997 was $409,790, a decrease of $84,923, or 17.2%, compared to $494,713 for
the six months ended June 30, 1996. The cost of goods sold decreased
commensurately with the decrease in sales but were offset by approximately
$97,000 of parts for 586 Systems that were replaced and written off, and by a
full reserve for obsolescence of approximately $225,000 for the remaining
computing units used in 486 Systems that are believed by Company management to
be saleable, but whose value is uncertain given changes in technology and
advances in the market.
Sales and marketing expenses. Sales and marketing expenses for the six
months ended June 30, 1997 were $1,489,195, an increase of $1,027,466, or
222.5%, compared to $461,729 for the six months ended June 30, 1996. This
increase resulted mainly from an increase in personnel, related travel,
infrastructure to support sales, VAR training programs, customer service,
additional U.S. and international marketing programs to support the launch of
new products, and public relations efforts, offset by a reduction in consulting
services for sales and marketing.
General and administrative expenses. General and administrative expenses
for the six months ended June 30, 1997 were $1,885,214, an increase of
$1,202,021, or 175.9%, compared to $683,193 for the six months ended June 30,
1996. This increase resulted from an increase in personnel, consulting, and
travel expenses related to the expansion and continued development of the
company's infrastructure, the implementation of certain strategic partnerships
and international operations, along with increases in legal, accounting and
other costs associated with being a publicly held company.
Research and development expenses. Research and development expenses for
the six months ended June 30, 1997 were $1,196,319, an increase of $497,936, or
71.3%, compared to $698,383 for the six months ended June 30, 1996. This
increase is the primarily the result of increased research and development
personnel, the use of outside consultants, and the planning and development
efforts for the Company's head mounted display, 586 Systems, Pentium Systems
and software, particularly for the Link Assist(TM) software.
Interest income (expense), net. Net interest income for the six months
ended June 30, 1997 was $49,129, an increase of $119,983 compared to ($70,854)
for the six months ended June 30, 1996. This increase is the result of interest
income from the investment of cash balances in 1997 versus interest expense on
convertible debentures and other borrowings in 1996.
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Net loss. As a result of the factors described above, the net loss for the
six months ended June 30, 1997 was $4,680,931, an increase of $2,888,406, or
161.1%, compared to $1,792,525 for the six months ended June 30, 1996. Although
the Company was subject to taxation during the six months ended June 30, 1997
and the six months ended June 30, 1996, the Company incurred net losses during
these periods and no provision for taxes was made.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until the completion of its Initial Public Offering
("IPO"), 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 debentures and in April 1996, the Company raised $1,000,000
through a second private placement of debentures. The Company received
$2,143,642 from these financings net of offering costs. The placement fees in
respect of these debentures of $270,500 were carried by the Company as
interest-bearing loans and were repaid from the proceeds of the IPO. On July
18, 1996, the Company completed its IPO and realized net proceeds of
$10,825,652 after related expenses.
On June 30, 1997, the Company completed a $3 million private placement of
an aggregate of 3,000 shares of the Company's Series A Preferred Stock, par
value $0.01 per share (the "Preferred Shares") with institutional investors.
The Preferred Shares have a stated value of $1,000 per share and a holder of
the Preferred Shares is entitled to receive, if and when declared by the
Company, a dividend equal to 5% of the stated value per share per annum payable
in shares of common stock of the Company, par value $0.01 per share (the
"Common Stock") or in cash. The Preferred Shares provide the Company with
several redemption options and alternatively allows for the periodic conversion
of portions of unredeemed Preferred Shares over a one-year period.
For the six months ended June 30, 1997, the Company's operating activities
used cash of $4,926,508 compared to a use of $728,778 for the corresponding
period in 1996. The net use of cash for the six month period ended June 30,
1997 was primarily the result of a $4,678,867 net loss, an increase in
inventories of $295,791 largely related to the production of the 586 System and
the Company's head mounted display, an increase in prepaid and other current
assets of $184,312, offset by depreciation and amortization costs of $158,482
and noncash compensation costs of $125,488. Cash used for investing activities
for the six months ended June 30, 1997 was $306,962 for the acquisition of
property and equipment, $344,294 in capitalized tooling costs related to the
production of the 586 System and the Company's head mounted display, and
$155,188 related to patents. The Company's financing activities for the six
months ending June 30, 1997 consisted of the placement of its Series A
Preferred Stock, which had net proceeds during the period of $2,995,000. As a
result of the above, cash on hand as of June 30, 1997, was $3,492,390.
At June 30, 1997, the Company had no material capital commitments and
working capital of $3,917,397.
The Company anticipates that its working capital requirements will increase
as the Company expands production and sales of the Mobile Assistant series,
continues to establish a full sales, service and marketing functions both in
the U.S. and internationally, expands the Company's ongoing research and
development efforts, 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. Without additional cash infusions, cash on hand as of June 30,
1997 is currently expected to be sufficient to meet the Company's operating and
working capital needs into the fourth quarter at current levels of cash usage.
To meet working capital needs thereafter, the Company intends to use funds from
operations, to obtain a working capital line of credit, and/or complete
additional financings. The Company has received several proposals for
financing, and the Company has completed a series of meetings with potential
licensees, joint venture partners and investors in the U.S., Europe and the
Middle East. It is the opinion of the Company's management that such financing
arrangements are readily available to the Company and the execution of such
arrangements is a decision that will depend on timing, market conditions and
the final terms and conditions of such arrangements, as well as adherence to
the Company's objective of minimizing dilution to existing shareholders by
raising minimum amounts of equity at current stock prices. Volume production of
the Mobile Assistant 586 System and Pentium System is expected to begin in the
quarter ending September 30, 1997 and receivables from sales of the Mobile
Assistant series are expected to provide collateral for working capital
borrowing facilities at that point. Company management believes that the
combination of cash on hand, operating cash flows, and outside funding will
provide sufficient liquidity to meet the Company's cash requirements until at
least March 1998. However, there can be no assurance that the
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Company can or will obtain sufficient funds from operations or from the
establishment of a working capital line of credit or from closing additional
financings on terms acceptable to the Company.
POSSIBLE IMPACT ON NEAR-TERM REVENUES
The Company has agreements with third-party suppliers to manufacture and
supply the body-worn computing unit, the head mounted display and the batteries
for the Mobile Assistant 586 System and Pentium System. Production by these
suppliers is expected to begin in the quarter ending September 30, 1997. In the
event that the start of production is delayed for any reason, revenues for the
year ending December 31, 1997 will be adversely affected.
POSSIBLE NON-CASH FUTURE CHARGE
In connection with the Company's IPO, the representative of the
underwriters for the transaction (the "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 meet or exceed targets which have been
established through negotiations with the Representative (the "Performance
Targets"). If the Performance Targets are not met in 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 in
amounts which have been agreed upon between the Representative and 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 and the market value of such shares at the time of
release will be deemed to be additional compensation expense to the Company. If
the price of the Common Stock at the time of any release of the Escrowed Shares
is greater than the value of the Common Stock at the time of the IPO, an
earnings charge could result which would have the effect of reducing or
eliminating any earnings per share and could have a negative effect on the
market price for the Common Stock. The earnings per share target calculation
will be based on the average number of shares issued and outstanding during
each period, but excluding shares issued pursuant to the Representative's
option to purchase units of Common Stock and Warrants issued at the Company's
IPO ("Unit") at a price of $9.075 per Unit (165% of the offering price of the
Units) during a period of four years commencing one year from the closing of
the IPO, extraordinary items, or compensation expense charged to the Company
related to the release of the Escrowed Shares.
Given the expected start of production in the quarter ending September 30,
1997, the Company's management believes that it is likely that the Company's
gross revenues and allowable losses will not meet the Performance Targets for
the 12-month period ending September 30, 1997. Accordingly, the release of the
Escrowed Shares for this period is only likely if the stock price equals or
exceeds $11.00 for 25 consecutive trading days or 30 out of 35 consecutive
trading days prior to September 30, 1997. If conditions are not met for release
of Escrowed Shares on that date, then 300,000 shares of stock will be returned
to the Company on September 30, 1997 and canceled, resulting in no earnings
impact and a reduction in shares outstanding of 2.1%.
Certain statements in the foregoing 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 within the meaning of The
Private Securities Litigation Reform Act of 1995 (the "Act"). In particular,
when used in the preceding discussion, the words "believes, expects, or intend
to" and similar conditional expressions are intended to identify
forward-looking statements within the meaning of the Act and are subject to the
safe harbor created by the Act. Such statements are subject to certain risks
and uncertainties and actual results could differ materially from those
expressed in any of the forward-looking statements. Such risks and
uncertainties include, but are not limited to, conditions in the general
acceptance of the Company's products and technologies, competitive factors, the
ability to successfully complete additional financings and other risks
described in the Company's SEC reports and filings.
11
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
27 FINANCIAL DATA SCHEDULE
b) REPORTS ON FORM 8-K
No reports on form 8-K were filed during the quarterly period ended
June 30, 1997.
12
<PAGE> 13
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.
XYBERNAUT CORPORATION
BY
-------------------------------------------------
Edward G. Newman
President and Chief Executive Officer
-------------------------------------------------
John F. Moynahan
Senior Vice President and Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED INCOME STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH 10QSB JUNE 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,492,390
<SECURITIES> 0
<RECEIVABLES> 430,128
<ALLOWANCES> 0
<INVENTORY> 698,173
<CURRENT-ASSETS> 5,002,713
<PP&E> 513,680
<DEPRECIATION> 243,249
<TOTAL-ASSETS> 6,308,338
<CURRENT-LIABILITIES> 1,025,316
<BONDS> 0
0
30
<COMMON> 142,591
<OTHER-SE> 18,433,205
<TOTAL-LIABILITY-AND-EQUITY> 6,308,338
<SALES> 125,032
<TOTAL-REVENUES> 140,032
<CGS> 258,229
<TOTAL-COSTS> 258,229
<OTHER-EXPENSES> 2,187,856
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,773
<INCOME-PRETAX> (2,298,280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,298,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,298,280)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
