SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Amendment No. 1)
(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, 1998 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: 0-21013
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
---- ----
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 August 13, 1998
Common stock - $0.01 par value 20,934,765
<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 18
SIGNATURES 19
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS June 30, 1998 December 31,
(unaudited) 1997
----------------------- ----------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,014,723 $ 952,366
Accounts receivable 182,363 216,767
Inventories 1,172,699 1,607,781
Prepaid and other current assets 399,883 334,245
----------------------- ----------------------
Total current assets 5,769,668 3,111,159
----------------------- ----------------------
Fixed assets:
Property and equipment, net 773,788 505,695
----------------------- ----------------------
Other assets:
Patent costs, net 414,683 384,422
Tooling costs, net 312,368 376,990
Other 163,396 153,351
----------------------- ----------------------
Total other assets 890,447 914,763
----------------------- ----------------------
Total assets $ 7,433,903 $ 4,531,617
======================= ======================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable $ - $ 19,530
Accounts payable 468,337 429,780
Accrued expenses 809,068 908,372
----------------------- ----------------------
Total current liabilities 1,277,405 1,357,682
----------------------- ----------------------
Total liabilities 1,277,405 1,357,682
----------------------- ----------------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value, 6,000,000 shares authorized;
3,000 shares designated as Series A, 2,250 shares issued and
outstanding as of December 31, 1997; 4,180 and 3,180 shares
designated as Series B, 3,180 shares issued and outstanding as
of December 31, 1997; 375 shares designated as Series C, 375
shares issued and outstanding as of June 30, 1998, at net
carrying value 364,754 4,193,355
Common stock, $.01 par value, 40,000,000 shares authorized;
20,934,765 and 14,360,515 issued and outstanding as of June
30, 1998 and December 31, 1997, respectively 209,348 143,605
Additional paid-in capital 27,636,785 17,181,329
Deferred compensation (9,042) (91,511)
Accumulated deficit (22,045,347) (18,252,843)
------------------------ ----------------------
Total stockholders' equity 6,156,498 3,173,935
----------------------- ----------------------
Total liabilities and stockholders' equity $ 7,433,903 $ 4,531,617
======================= ======================
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------- ----------------------------------------
1998 1997 1998 1997
------------------ ------------------ ----------------- ------------------
Revenue:
<S> <C> <C> <C> <C>
Product sales and leases $ 229,634 $ 125,032 $ 356,861 $ 220,458
Consulting and license 1,839 15,000 1,839 30,000
------------------ ------------------ ----------------- ------------------
Total revenue 231,473 140,032 358,700 250,458
Cost of sales 271,905 258,229 379,476 409,790
------------------ ------------------ ----------------- ------------------
Gross profit (loss) (40,432) (118,197) (20,776) (159,332)
Operating expenses:
Sales and marketing 656,042 729,655 1,151,147 1,489,195
General and administrative 966,199 893,803 1,617,879 1,885,214
Research and development 643,413 564,398 1,010,769 1,196,319
------------------ ------------------ ----------------- ------------------
Total operating expenses 2,265,654 2,187,856 3,779,795 4,570,728
------------------ ------------------ ----------------- ------------------
Operating loss (2,306,086) (2,306,053) (3,800,571) (4,730,060)
Interest income, net 2,902 7,773 8,066 49,129
------------------ ------------------ ----------------- ------------------
Net loss (2,303,184) (2,298,280) (3,792,505) (4,680,931)
---------------- ------------------ ------------------ ------------------
Provision for preferred stock
dividends 20,657 --- 56,559 ---
Provision for accretion on
preferred stock beneficial
conversion feature 533,264 --- 907,489 ---
-------------------- --------------------- ------------------ ---------------------
Net loss applicable to holders
of common stock $ (2,857,105) $ (2,298,280) $ (4,756,553) $ (4,680,931)
================== ================== ================= ==================
Per common share (basic and
diluted):
Net loss before provision for
preferred stock $ (0.13) $ (0.18) $ (0.24) $ (0.38)
Total provisions for preferred
stock (0.03) - (0.07) -
------------------- ------------------ ---------------- -----------------
Net loss applicable to holders
of common stock $ (0.16) $ (0.18) $ (0.31) $ (0.38)
================== ================== ================= ==================
Weighted average number of
common shares outstanding
(basic and diluted) 17,343,590 12,459,112 15,516,067 12,459,112
================== ================== ================= ==================
</TABLE>
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<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Six Months Ended June 30,
--------------------------------------------
1998 1997
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities
Net loss attributable to common stock $ (3,792,505) $ (4,680,931)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 152,185 160,547
Provision for bad debts (30,697) -
Non cash charges for tooling costs 138,682 -
Non cash charges for stock and options issued for services 82,469 125,488
Inventories 109,731 (295,792)
Accounts receivable 65,101 (2,338)
Prepaid and other current assets (65,638) (184,312)
Other assets (10,528) (4,798)
Accounts payable and accrued expenses (14,873) (74,373)
Deferred licensing revenue - (30,000)
------------------- --------------------
Net cash used in operating activities (3,366,073) (4,986,509)
------------------- --------------------
Cash flows from investing activities:
Acquisition of property and equipment, net (33,515) (306,962)
Acquisition of patents and related costs (91,190) (155,888)
Capitalization of tooling costs and other assets (74,060) (284,294)
-------- ---------
Net cash used in investing activities (198,765) (747,144)
------------------- --------------------
Cash flows from financing activities:
Proceeds from:
Preferred stock offerings 1,348,496 2,785,000
Common stock offerings 5,307,048 -
Initial Public Offering, gross - 215,000
Payments for:
Notes and loans (19,530) (48,924)
Other (8,819) -
------------------- --------------------
Net cash used in financing activities 6,627,195 2,951,076
------------------- --------------------
Net decrease in cash and cash equivalents 3,062,357 (2,782,577)
Cash and cash equivalents, beginning of period 952,366 6,274,967
------------------- --------------------
Cash and cash equivalents, end of period $ 4,014,723 $ 3,492,390
=================== ====================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,500 $ 8,527
=================== ====================
Supplemental disclosure of non-cash financing activities:
Common stock issued for preferred stock dividend requirements $ 84,022 $ -
=================== ====================
Common stock issued for services rendered $ 98,438 $ -
=================== ====================
Provision for preferred stock dividend requirements $ 56,559 $ -
=================== ====================
</TABLE>
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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 30,1998 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. New Accounting Pronouncements
The Financial Accounting Standards Board has issued two new standards
which become effective for reporting periods beginning after December 15, 1997.
SFAS No. 130, "Reporting Comprehensive Income", requires additional disclosures
with respect to certain changes in assets and liabilities that previously were
not required to be reported as results of operations for the period. SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information",
requires financial and descriptive information with respect to "operating
segments" of an entity based on the way management disaggregates the entity for
making internal operating decisions. There is no impact on the financial
statements from the adoption of these pronouncements.
In addition, the Financial Accounting Standards Board has issued, SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
becomes effective for years beginning after June 15, 1999. SFAS No. 133 requires
that every derivative instrument be recorded in the balance sheet as either an
asset or a liability measured at its basic value. The statement requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge amortizing criteria are met. The Company believes that the effect of the
adoption of SFAS No. 133 on the Company will not be material.
4. Preferred Stock
In January 1998, the Company placed 1,000 shares of Series B Preferred
Stock and received cash proceeds of approximately $974,000 from this issuance.
In connection with this placement and
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<PAGE>
the placement of 3,000 shares of Series B Preferred Stock in November 1997, the
placement agent received 50,000 shares of Common Stock in lieu of 60 shares of
Series B Preferred, warrants to purchase 25,000 shares of Common Stock at
$2.1313 and warrants to purchase 75,000 shares of Common Stock at $3.025. During
the six months ended June 30, 1998, 2,250 shares of Series A Preferred Stock and
4,180 shares of Series B Preferred Stock were converted to 4,878,074 shares of
Common Stock, pursuant to their respective terms. As of the current date, all of
the 3,000 shares of Series A Preferred Stock and 4,180 shares of Series B
Preferred Stock issued by the Company have been fully converted resulting in the
issuance of 1,958,984 and 3,172,239 shares of Common Stock, respectively.
In May 1998, the Company placed 375 shares of Series C Preferred Stock
and received cash proceeds of $375,000 from this issuance. No shares of Series C
Preferred Stock have been converted as of the date hereof.
5. Commitments
The Company entered into a Memorandum of Understanding ("MOU") with
Sony Digital Products ("SODP") on May 14, 1998. This agreement obligates the
Company to reimburse SODP Yen 100 million over a ten month period commencing
April 1998. These payments are reimbursements to SODP for engineering and
development of the Company's Mobile Assistant IV(TM). The Company, through June
1998, has remitted to SODP Yen 15 million under the Memorandum of Understanding
in accordance with the payment terms. The balance of the payments and the
related recognition of expense will occur as the services are provided by SODP
to the Company.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION.
Overview
The Company was incorporated as a Virginia company in October 1990 and
commenced active operations in November 1992 as Computer Products & Services,
Inc. to develop, manufacture and sell mobile computing systems. Since commencing
operations, the Company has incurred significant operating losses. In April
1996, the Company was merged with Xybernaut Corporation in order to change the
company name and reincorporate in Delaware. In July 1996, the Company
successfully completed the initial public offering ("IPO") of its Common Stock
and Warrants which are traded on the NASDAQ SmallCap Market.
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") that was produced in a
limited quantity and is no longer being manufactured. Product development has
been based on the expectation of the Company 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
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<PAGE>
undertook a product development program that resulted in the second product
offering in the Mobile Assistant(R) Series, which was introduced on a
preproduction basis in January 1997 and which used "586" based technology
("Mobile Assistant(R) II System"). The Mobile Assistant(R) II was replaced by
the third system in this product development program, which was introduced
during the third quarter of 1997 and uses a Pentium(R) processor running at 133
MHZ ("133P System"). The 133P 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., and Texas Instruments, among others. In the fourth quarter of
1997, the Company announced the fourth system in this product development
program, the Mobile Assistant(R) IV ("MA IV"), which uses a Pentium chipset
known as the "Tillamook" that runs at up to 266 MHZ.
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 announced the introduction of linkAssist(TM),
a software product which 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 has announced webAssist(TM), a software product that allows voice
navigation of HTML document links such as those found on the World Wide Web and
intranets.
The Company has derived its revenues from sales of the Mobile
Assistant(R) Series, less volume discounts, and from consulting services related
to the Mobile Assistant(R), application software for the Mobile Assistant(R),
and other computer platforms. During the three months ended June 30, 1998, the
Company derived 99% of its revenues from sales of the Mobile Assistant(R). For
the three months ended June 30, 1997, the Company derived approximately 89% of
its revenues from sales of the Mobile Assistant(R) and 11% of its revenues from
consulting services and licensing revenues. In the future, the Company expects
to derive additional revenues from the sale of software and additional optional
components of the Mobile Assistant(R) Series. Revenues from sales to customers,
VARs and OEMs 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 master is delivered in accordance with Statement of Position No.
91-1. Cost of sales include the cost of components for the Mobile Assistant(R)
Series, direct labor and overhead expense, manuals, diskettes and duplication,
packaging materials, assembly, paper goods and shipping.
The Company intends to continue expenditures on research and
development of additional hardware and software products. Research and
development activities consist primarily of personnel engaged in the research
and design of new products, test components, consulting fees and equipment costs
required to conduct the Company's development activities. Software development
costs are expensed as incurred until technological feasibility is established in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS No. 86,
Accounting for the Costs of Computer
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<PAGE>
Software to be Sold, Leased or Otherwise Marketed), after which any additional
costs are capitalized until the software is ready for release. The Company
started limited shipments of its linkAssist(TM) software late in the year ended
December 31, 1997, but the costs eligible for capitalization under SFAS were
immaterial during this period and were not capitalized. The Company expects such
costs to be immaterial during the coming fiscal year. Research and development
expenses for the three months ended June 30, 1998 and 1997 were $643,413 and
$564,398, respectively, none of which was capitalized.
The Company's consolidated financial statements, for all periods
presented, include the results of operations of Tech Virginia, a wholly-owned
subsidiary that supplies software and consulting services to the United States
government and others. In July 1996, the Company exercised its option to
purchase all of the capital stock of Tech Virginia and completed payments under
this option during the year ended December 31, 1997. The consolidated financial
statements contain eliminations for all material transactions between the
Company and Tech Virginia for all periods presented.
The Company's consolidated financial statements do not contain a
provision for income tax expense due to the net operating losses incurred since
inception. Subject to realization, the Company has generated net operating
losses 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 (see Note 9 to Consolidated
Financial Statements). At June 30, 1998, the Company had approximately
$16,000,000 of net operating loss carry forwards for federal income tax purposes
which expire in 2012. The use of these carry forwards may be limited in any one
year under Internal Revenue Code Section 382 if significant ownership changes
occur.
The Company is aware of the computing issues associated with the coming
of the millennium (year 2000), most notably whether computer systems will
properly recognize date sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate erroneous
data or cause a system to fail. Based on preliminary investigations and the
representations of several of its suppliers, the Company currently believes that
computers and software used in its operations and sold by the Company are year
2000 compliant. The Company is working with its suppliers and customers to
either verify year 2000 compliance or identify and execute appropriate changes
to make such systems year 2000 compliant. The Company believes that the cost of
completing any modifications for year 2000 compliance to the systems used or
sold by the Company will not be material. However, there can be no assurance
that the Company's suppliers will be correct in their assertions that their
products are year 2000 compliant or that the Company's estimate of the cost of
systems modifications for year 2000 compliance will prove ultimately to be
correct.
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<PAGE>
Results of Operations
The following table sets forth items from the Consolidated Statements
of Income as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ----------------------------
6/30/98 6/30/97 6/30/98 6/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues 100% 100% 100% 100%
Cost of sales 117.5% 184.4% 105.8% 163.6%
------ ------ ------ ------
Gross margin (17.5)% (84.4)% (5.8)% (63.6)%
Operating expenses:
Sales & marketing 283.4% 521.1% 320.9% 594.6%
General & administrative 417.4% 638.3% 451.0% 752.7%
Research & development 277.9% 403.0% 281.8% 477.7%
------ ------ ------ ------
Total operating expense 978.7% 1,562.4% 1,053.7% 1,825.0%
Interest income 1.3% 5.6% 2.2% 19.6%
---- ---- ---- -----
Net loss (995.0%) (1,641.2%) (1,057.3%) (1,869.0%)
======== ========== ========== ==========
Provisions for preferred stock 239.3% - 268.8%
========= ========== ========== ==========
Net loss applicable to holders
of common stock (1,234.3%) (1,641.2%) (1,326.1%) (1,869.0%)
========== ========== ========== ==========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues for the three months ended June 30, 1998 were
$231,473, an increase of $91,441, or 65.3%, compared to $140,032 for the
corresponding period in 1997. Product revenues for the three months ended June
30, 1998 were $229,634, an increase of $104,602 or 83.7%, compared to $125,032
for the corresponding period in 1997. The increase in product revenues for the
three months ended June 30, 1998 was related to the higher number of 133P
Systems that were sold during that period, compared to the higher number of 586
Systems that were sold in the corresponding period in 1997. Consulting and
license revenues for the three months ended June 30, 1998 were $1,839 a decrease
of $13,161 or 87.7%, compared to $15,000 for the corresponding period in 1997.
The decrease in consulting and license revenues was due to the lack of sales
activity under a License Agreement with Rockwell International that was related
to the restructuring of Rockwell's operations.
Cost of Sales. The cost of goods sold for the three months ended June
30, 1998 was $271,905, an increase of $13,676, or 5.3%, compared to $258,229 for
the corresponding period in 1997. The cost of goods sold increased
commensurately with the increase in product sales but was offset by a charge of
approximately $120,000 in 1997 to reduce the carrying value of an earlier
versions of the computing unit for Mobile Assistant II Systems to estimated
market value.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 1998 were $656,042, a decrease of $73,613, or 10.1%, compared to
$729,655 for the corresponding period in 1997. The decrease was due to a change
in compensation structure for sales personnel
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which resulted in lower base salaries, a reduction in travel related expenses
due to the centralization of sales staff, and a decrease in the use of outside
consultants for sales and marketing programs.
General and Administrative. General and administrative expenses for the
three months ended June 30, 1998 were $966,199, an increase of $72,396, or 8.1%,
compared with $893,803 for the corresponding period in 1997. This increase
resulted primarily from an increase in activities related to discussions
regarding certain strategic partnerships and international operations.
Research and Development. Research and development expenses for the
three months ended June 30, 1998 were $643,413, an increase of $79,015, or
14.0%, compared with $564,398 for the corresponding period in 1997. This
increase is the primarily the result of increased development expenses for the
Mobile Assistant IV System.
Interest Income, Net. Net interest income for the three months ended
June 30, 1998 was $2,902, a decrease of $4,871, or 62.7%, compared with $7,773
for the corresponding period in 1997. This decrease is the result of reduced
interest income from the lower average cash balances in the three months ended
June 30, 1998 than for the corresponding period a year earlier, which reflected
the interest income on proceeds from the Company's Initial Public Offering that
was completed in July 1996.
Dividend on preferred stock, and deemed dividend accretion on preferred
stock. We issued our Series A Preferred Stock on June 30, 1997. The Series A
Preferred Stock accrued dividends at 5% per annum on the outstanding principal
amount. We issued our Series B Preferred Stock on November 11, 1997. The Series
B Preferred Stock accrued dividends at 4% per annum on the outstanding principal
amount. We issued our Series C Preferred Stock on May 15, 1998. The Series C
Preferred Stock accrues dividends at 5% per annum on the outstanding principal
amount. For the three months ended June 30, 1998, the amount of accrued dividend
was $20,657, an increase of $20,657, or 100% for the corresponding period in
1997. In accordance with the Emerging Issues Task Force report titled
"Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature," a deemed dividend was assumed for the
Series A and Series B Preferred Stock, which was accreted periodically as
portions of the Series A and Series B Preferred Stock were converted into Common
Stock. The amount of this accretion for the three months ended June 30, 1998 was
$533,264, an increase of $533,264 or 100%, compared to the corresponding period
in 1997. Additional paid in capital was reduced by the amount of accretion and
preferred stock was increased by the amount of accretion, resulting in no impact
on the overall amount of stockholder's equity.
Net Loss Attributable to Common Stock. As a result of the factors
described above, the net loss attributable to Common Stock for the three months
ended June 30, 1998 was $2,857,105, an increase of $558,825, or 24.3%, compared
to $2,298,280 for the corresponding period in 1997. Although the Company was
subject to taxation during the three months ended June 30, 1998 and June 30,
1997, the Company incurred net losses during these periods and no provision for
income taxes was made.
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<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Revenues. Total revenues for the six months ended June 30, 1998 were
$358,700, an increase of $108,242, or 43.2%, compared to $250,458 for the
corresponding period in 1997. Product revenues for the six months ended June 30,
1998 were $356,861, an increase of $136,403, or 61.9%, compared to $220,458 for
the corresponding period in 1997. The increase in product revenues for the three
months ended June 30, 1998 was related to the higher number of 133P Systems that
were sold during that period, compared to the higher number of 486 and 586
Systems that were sold in the corresponding period in 1997. The decrease in
consulting and license revenues was due to the lack of sales activity under a
license agreement with Rockwell International that was related to the
restructuring of Rockwell's operations.
Cost of Sales. The cost of goods sold for the six months ended June 30,
1998 was $379,476, a decrease of $30,314, or 7.4%, compared to $409,790 for the
corresponding period in 1997. The cost of goods sold increased commensurately
with the increase in sales but were offset by charges in 1997 of 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, 1998 were $1,151,147, a decrease of $338,048, or 22.7%,
compared to $1,489,195 for the corresponding period in 1997. This decrease was
due to a change in compensation structure for sales personnel which resulted in
lower base salaries, a reduction in travel related expenses due to the
centralization of sales staff, and a decrease in the use of outside consultants
for sales and marketing programs.
General and administrative expenses. General and administrative
expenses for the six months ended June 30, 1998 were $1,617,879, a decrease of
$267,335, or 14.2%, compared to $1,885,214 for the corresponding period in 1997.
This decrease resulted primarily from a reduction in personnel and related
occupancy expenses, along with a decrease in travel expenses. These were offset
by an increase in activities related to international operations.
Research and development expenses. Research and development expenses
for the six months ended June 30, 1998 were $1,010,769, an increase of $185,550,
or 15.5%, compared to $1,196,319 for the corresponding period in 1997. This
increase is the primarily the result of increased development expenses for the
Mobile Assistant IV System.
Interest income, net. Net interest income for the six months ended June
30, 1998 was $8,066, a decrease of $41,063, or 83.6%, compared to $49,129 for
the corresponding period in 1997. This decrease is the result of reduced
interest income from the lower average cash balances in the six months ended
June 30, 1998 than for the corresponding period in 1997, which reflected the
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interest income on proceeds from the Company's initial public offering that was
completed in July 1996.
Dividend on preferred stock, and deemed dividend accretion on preferred
stock. We issued our Series A Preferred Stock on June 30, 1997. The Series A
Preferred Stock accrued dividends at 5% per annum on the outstanding principal
amount. We issued our Series B Preferred Stock on November 11, 1997. The Series
B Preferred Stock accrued dividends at 4% per annum on the outstanding principal
amount. We issued our Series C Preferred Stock on May 15, 1998. The Series C
Preferred Stock accrues dividends at 5% per annum on the outstanding principal
amount. For the six months ended June 30, 1998, the amount of accrued dividend
was $56,559, an increase of $56,559, or 100% for the corresponding period in
1997. In accordance with the Emerging Issues Task Force report titled
"Accounting for the Issuance of Convertible Preferred Stock and Debt Securities
with a Nondetachable Conversion Feature," a deemed dividend was assumed for the
Series A and Series B Preferred Stock, which was accreted periodically as
portions of the Series A and Series B Preferred Stock were converted into Common
Stock. The amount of this accretion for the six months ended June 30, 1998 was
$907,489, an increase of $907,489 or 100%, compared to the corresponding period
in 1997. Additional paid in capital was reduced by the amount of accretion and
preferred stock was increased by the amount of accretion, resulting in no impact
on the overall amount of stockholder's equity.
Net Loss Attributable to Common Stock. As a result of the factors
described above, the net loss attributable to common stock for the six months
ended June 30, 1998 was $4,756,553, an increase of $75,622, or 1.6%, compared to
$4,680,931 for the corresponding period in 1997. Although the Company was
subject to taxation during the six months ended June 30, 1998 and the six months
ended June 30, 1997, the Company incurred net losses during these periods and no
provision for taxes was made.
Liquidity and Capital Resources
Since its inception until the completion of the IPO, the Company
financed its operations from the private sale of its securities, from vendor
credit and from short-term loans received from management, stockholders and
others.
From October 1994 to August 1995 the Company raised approximately
$1,243,000 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
convertible debentures and in April 1996, the Company raised $1,000,000 through
a second private placement of convertible debentures. The Company received
approximately $2,140,000 from these financings net of offering costs. The
placement fees in respect of these financings were carried by the Company as
interest-bearing loans and were repaid from the proceeds of the IPO and realized
gross proceeds of approximately $13,280,000 and net proceeds of approximately
$10,840,000 after related expenses.
On June 30, 1997, the Company completed a $3 million private placement of
an aggregate of 3,180 shares of the Company's Series A Preferred Stock, par
value $0.01 per share ("Series A Preferred Stock"), and realized gross proceeds
of $3,000,000 and net proceeds of approximately
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<PAGE>
$2,762,000 after related expenses. The holders of the Series A Preferred Stock
converted all such shares resulting in the issuance of 1,958,981 shares of
Common Stock.
On November 12, 1997, the Company completed a $3 million private
placement of an aggregate of 3,000 shares of the Company's Series B Preferred
Stock, par value $0.01 per share ("Series B Preferred Stock"), and realized
gross proceeds of $3,180,000 and net proceeds of approximately $2,950,000 after
related expenses. On February 23, 1998, the Company completed a follow-on
placement of its Series B Preferred and realized gross proceeds of $1,000,000
and net proceeds of approximately $990,000 after related expenses. The holders
of the Series B Preferred Stock converted all such shares resulting in the
issuance of 3,172,239 shares of Common Stock.
In April 1998, the Company entered into an equity line of credit
agreement with institutional investors who had formerly invested in the Company
in which the Company received an initial gross amount of $1,000,000 in exchange
for Common Stock. Under this line of equity the Company has the right, but not
the obligation, to obtain up to an additional $10,000,000 in a series of equity
drawdowns based on terms and conditions specified in the line of equity. In
connection with this line of equity, the Company issued warrants to purchase up
to 40,000 shares of stock at $1.76 and 20,000 shares of stock at $2.81 at any
time starting six months after closing and ending five years after closing. The
placement agent for this transaction received a cash fee of 5% and 50,000 shares
of unregistered stock.
In May 1998, the Company completed a $750,000 private placement of an
aggregate of 375 shares of the Company's Series C Preferred Stock, par value
$0.01 per share ("Series C Preferred Stock") and 110,294 shares of Common Stock
with institutional investors who had formerly invested in the Company. The
Series C Preferred Stock has a stated value of $1,000 per share and a holder of
the Series C Preferred Stock 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 or in cash, payable upon conversion of the Series C
Preferred Stock. The Series C Preferred Stock also provides the Company with
several redemption options and allows for the periodic conversion of portions of
unredeemed Series C Preferred Stock over a two-year period ending May 15, 2000.
Any Series C Preferred Stock outstanding on May 15, 2000 must be converted into
Common Stock at that date.
In June 1998, the Company completed a $1,000,000 private placement with
an institutional investor who had formerly invested in the Company in which the
Company issued 153,846 unregistered shares of Common Stock.
In June 1998, the Company amended and exercised a put option in the
aggregate principal amount of $3,000,000 under the private line of equity
agreement mentioned above. In connection with such action, the Company issued
545,454 shares of Common Stock. Such shares are subject to restrictions on
resale for a period of nine months and to repricing upon occurrences of certain
conditions. In addition, the Company issued five-year warrants to purchase up to
300,000 shares of Common Stock at a price of $5.25.
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<PAGE>
For the six months ended June 30, 1998, the Company's operating
activities used cash of $3,366,073. The net use of cash by operations for the
six months ended June 30, 1998 was primarily the result of a $3,792,505 net
loss. This was offset by a net decrease in inventories of $109,731, depreciation
and amortization of $152,185 and non-cash charges for tooling costs of $138,682.
Cash used for investing activities for the six months ended June 30, 1998 was
$198,765 which included $91,190 related to patents and $74,060 in capitalized
tooling costs. Proceeds from the Company's financing activities for the six
months ended June 30, 1998 were $6,627,195 which primarily consisted of
$5,307,048 from the issuance of the Company's Common Stock, net of related fees
and $1,348,496 from the issuance of the Company's Series B and Series C
Preferred Stock, net of related fees. As a result of the above, cash and cash
equivalents on hand as of June 30, 1998 was $4,014,723, an increase of
$3,062,357 from the $952,366 of cash and cash equivalents on hand as of December
31, 1997.
For the six months ended June 30, 1997, the Company's operating
activities used cash of $4,986,509. The net use of cash for the six month period
ended June 30, 1997 was primarily the result of a $4,680,931 net loss, an
increase in inventories of $295,792 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
$160,547 and non-cash compensation costs of $125,488. Cash used for investing
activities for the six months ended June 30, 1997 was $747,144 which included
$306,962 for the acquisition of property and equipment, $284,294 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. Proceeds from the Company's
financing activities for the six months ending June 30, 1997 were $2,951,076
which primarily consisted of $2,785,000 from the issuance of its Series A
Preferred Stock and deferred placement fees of $215,000. As a result of the
above, cash on hand as of June 30, 1997, was $3,492,390, a decrease of
$2,782,577 from the $6,274,967 of cash and cash equivalents on hand as of
December 31, 1996.
At June 30, 1998, the Company had no material capital commitments and
working capital of $4,492,263.
On March 19, 1998, Matrix Corporation filed a summons against the
Company in the United States District Court, Eastern District of North Carolina,
alleging that: Matrix has been damaged by a purported breach of the December
Agreement by the Company; that the Company should return all goods shipped by
Matrix under both the June Agreement and the December Agreement; that the
Company did not intend to comply with the December Agreement and therefore the
governing contract between the two entities should revert to the June Agreement.
In addition, this summons requests that any damages incurred by Matrix as a
result of this purported breach of contract be trebled. On April 30, 1998, the
Company filed a motion in the same court to dismiss the complaints contained in
the March 19, 1998 filing by Matrix. While there can be no assurance of the
outcome of this legal proceeding, the Company's management believes that the
claims by Matrix are groundless and that the impact of this legal proceeding
will not be adversely material to the Company's operations. The maximum amount
payable by the Company under the December Agreement if Matrix performs defined
tasks is approximately $250,000 and the maximum amount of inventory that could
be assumed by the Company under the December Agreement is approximately
$600,000.
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<PAGE>
The Company anticipates that its working capital requirements and
operating expenses will increase as the Company expands production and sales of
the Mobile Assistant(R), and expands its full sales, service and marketing
functions, and develops the support structure for these activities. The timing
of increases in personnel and other expenses, the amount of working capital
consumed by operations, marketing and rollout expenses for the MA IV, and
competitive pressures on gross margins will impact the magnitude and timing of
the Company's cash requirements. To meet working capital needs, the Company has
completed a $10 million equity line of credit and intends to use funds from
operations, to obtain a working capital line of credit, and/or complete
additional financings. It is the opinion of the Company's management that
additional funding arrangements are readily available to the Company and the
execution of any such arrangement will depend on timing, market conditions and
the final terms and conditions of such arrangements. Full production of the MA
IV model of the Mobile Assistant(R) is expected to begin in the quarter ending
December 31, 1998 and receivables from sales of the MA IV are expected to
provide collateral for borrowing facilities at that point. Although there can be
no assurance that such facilities will be available, the Company intends to seek
to establish secured borrowing facilities at such time as appropriate collateral
is available. The Company's management believes that the combination of cash on
hand, operating cash flow, and outside funding will provide sufficient liquidity
to meet the Company's cash requirements until at least March 1999. However,
there can be no assurance that the Company can or will obtain sufficient funds
from operations or from 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 HMD and the batteries for the 133P
and the MA IV. Production of the computing unit for the 133P has been
substantially curtailed pending the introduction of the MA IV in the fourth
quarter, although management believes that it can restart production to meet
large orders. As a result, revenue growth is expected to be modest through the
first three quarters of the year ending December 31, 1998, until full-scale
production by these MA IV suppliers is started and these units are sold in
volume, which is expected to begin in the quarter ending December 31, 1998. In
the event that the start of full-scale production is delayed for any reason,
revenues for the year ending December 31, 1998 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
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<PAGE>
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.
The Company's gross revenues and allowable losses did not meet the
Performance Targets for the 12-month period ending September 30, 1997, and the
stock price did not meet the levels described above by that time. Pursuant to
the terms of the escrow agreement, 300,000 of the Escrowed Shares were canceled,
resulting in no earnings impact and a reduction in shares outstanding at that
time of approximately 2.1%. Given the expected start of full-scale production of
the MA IV in the quarter ending December 31, 1998, 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, 1998. Accordingly, the release of the escrow 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, 1998. If conditions are not met for release from escrow, then
750,000 shares of stock will be returned to the Company on September 30, 1998
and canceled, resulting in no earnings impact and a commensurately lower number
of outstanding shares.
Since the Company has reported losses, the loss per share for the
Company is calculated using outstanding shares less shares held in escrow to
avoid antidilution. Therefore, the cancellation of shares from escrow does not
affect the reported loss per share.
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 intends
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,
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<PAGE>
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.
-18-
<PAGE>
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
*4.1 Private Line of Equity Agreement
*4.2 Form of Warrant A
*4.3 Form of Warrant B
**4.4 Form of Warrant Issued in Connection with the Exercise of the
Put Option
**10.1 Amendment and Modification Agreement (Exercise of $3,000,000
Put Option)
27.1 Financial Data Schedule
--------------------
* Incorporated by reference to the correspondingly numbered exhibit
included in the Company's Registration Statement on Form S-3, Commission File
No. 333-52567.
** Previously filed.
b) REPORTS ON FORM 8-K
A report on Form 8-K was filed on June 4, 1998 to report the
resignation of John F. Moynahan from the Board of Directors effective June 3,
1998, and the appointment, effective June 5, 1998 of Mr. Kaz Toyosato to the
Board of Directors to fill such vacancy.
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<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.
XYBERNAUT CORPORATION
By: /s/ Edward G. Newman
---------------------------------
Edward G. Newman
President and Chief Executive Officer
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<PERIOD-START> Apr-01-1998
<PERIOD-END> Jun-30-1998
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