SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q SB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 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: 0-15086
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____ 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 May 14, 1998
Common stock - $0.01 par value 19,622,946
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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 8
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
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XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, 1998 December 31,
(unaudited) 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 446,024 $ 952,366
Accounts receivable 178,661 216,767
Inventories 1,589,025 1,607,781
Prepaid and other current assets 332,316 334,245
------------ ------------
Total current assets 2,546,026 3,111,159
------------ ------------
Fixed assets:
Property and equipment, net 481,521 505,695
Other assets:
Patent costs, net 392,566 384,422
Tooling costs, net 451,050 376,990
Other 148,197 153,351
------------ ------------
Total other assets 991,813 914,763
------------ ------------
Total assets $ 4,019,360 $ 4,531,617
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable $ -- $ 19,530
Accounts payable 381,159 429,780
Accrued expenses 1,031,763 908,372
------------ ------------
Total current liabilities 1,412,922 1,357,682
------------ ------------
Total liabilities 1,412,922 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,
1,500 and 2,250 shares issued and outstanding as
of March 31, 1998 and December 31, 1997,
respectively; 4,180 and 3,180 shares designated as
Series B, 3,240 and 3,180 shares issued and
outstanding as of March 31, 1998 and December 31,
1997, respectively, at net carrying value 3,880,823 4,193,355
Commonstock, $.01 par value, 40,000,000 shares
authorized; 15,745,727 and 14,360,515 issued and
outstanding as of March 31, 1998 and December 31,
1997, respectively 157,457 143,605
Additional paid-in capital 18,346,488 17,181,329
Deferred compensation (36,167) (91,511)
Accumulated deficit (19,742,163) (18,252,843)
------------ ------------
Total stockholders' equity 2,606,438 3,173,935
------------ ------------
Total liabilities and stockholders' equity $ 4,019,360 $ 4,531,617
============ ============
</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 March 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Product sales and leases $ 127,227 $ 95,426
Consulting and license -- 15,000
------------ ------------
Total revenue 127,227 110,426
Cost of sales 107,571 151,561
------------ ------------
Gross profit (loss) 19,656 (41,135)
Operating expenses:
Sales and marketing 495,105 759,540
General and administrative 651,680 991,411
Research and development 367,356 631,921
------------ ------------
Total operating expenses 1,514,141 2,382,872
------------ ------------
Operating loss (1,494,485) (2,424,007)
Interest income, net 5,164 41,356
------------ ------------
Net loss (1,489,321) (2,382,651)
------------ ------------
Provision for preferred stock dividends accrued 35,902 --
Provision for accretion on preferred stock beneficial conversion feature 374,225 --
------------ ------------
Net loss applicable to holders of common stock $ (1,899,448) $ (2,382,651)
============ ============
Per common share (basic and diluted):
Net loss before provisions for preferred stock dividend and accretion $ (0.10) $ (0.19)
Total provisions for preferred stock dividend and accretion (0.03) --
------------ ------------
Net loss applicable to holders of common stock $ (0.13) $ (0.19)
============ ============
Weighted average number of common shares outstanding (basic and diluted) 15,168,238 12,459,112
============ ============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,489,321) $(2,382,651)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 55,282 74,356
Provision for bad debts 25,000 --
Non cash charges for stock and options issued for services 55,344 125,488
Changes in assets and liabilities:
Inventories 18,756 (394,187)
Accounts receivable 13,106 18,839
Prepaid and other current assets 1,929 (182,208)
Other assets 4,749 (6,261)
Accounts payable and accrued expenses (23,668) 23,053
Deferred licensing revenue -- (15,000)
----------- -----------
Net cash used in operating activities (1,338,823) (2,738,571)
Cash flows from investing activities:
Acquisition of property and equipment, net (1,318) (262,541)
Acquisition of patents and related costs (37,529) (63,508)
Capitalization of tooling costs (74,060) (269,964)
----------- -----------
Net cash used in investing activities (112,907) (596,013)
----------- -----------
Cash flows from financing activities:
Proceeds from:
Preferred stock offerings 973,737 --
Payments for:
Notes and loans (19,530) (28,445)
Other (8,819) --
----------- -----------
Net cash provided by (used in) financing activities 945,388 (28,445)
----------- -----------
Net decrease in cash and cash equivalents (506,342) (3,363,029)
Cash and cash equivalents, beginning of period 952,366 6,274,967
----------- -----------
Cash and cash equivalents, end of period $ 446,024 $ 2,911,938
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ -- $ 7,108
=========== ===========
Supplemental disclosure of non-cash financing activities:
Common stock issued for services rendered $ 98,438 $ --
Common stock issued for preferred stock dividend requirements $ 26,289 $ --
=========== ===========
</TABLE>
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 Item 310 of Regulation
S-B. 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 three
months ended March 31,1998 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. INCOME TAX
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 $16.0 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 fully utilized to offset taxable
operating income.
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 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 three months ended March 31, 1998, 750
shares of Series A Preferred Stock and 940 shares of Series B Preferred Stock
were converted to 1,385,212 shares of Common Stock, pursuant to the terms of
those issues.
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5. Subsequent Events
In April 1998, the Company entered into an equity line of credit
agreement in which the Company received an initial gross amount of $1,000,000 in
exchange for Common Stock, from which the Company received net cash proceeds of
approximately $915,000. Under this line of equity the Company has the right, but
not the obligation, to obtain up to $10,000,000 in a series of equity drawdowns
based on specified terms and conditions. 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.
Between April 1, 1998 and the date hereof, 750 shares of Series A
Preferred Stock and 3,240 shares of Series B Preferred Stock were converted into
3,036,703 shares of Common Stock. As of the date hereof, there are 19,622,554
shares of Common Stock, 750 shares of Series A Preferred Stock and no shares of
Series B Preferred Stock outstanding.
7
<PAGE>
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 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(R) 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
8
<PAGE>
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 March 31, 1998, the
Company derived 100% of its revenues from sales of the Mobile Assistant(R). For
the three months ended March 31, 1997, the Company derived approximately 86% of
its revenues from sales of the Mobile Assistant(R) and 14% 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.
97-2. 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 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
the quarter ended March 31, 1998 and were not capitalized. The Company expects
such costs to be material during the coming fiscal year and expects to
capitalize such costs during this period. Research and development expenses for
the three months ended March 31, 1998 and 1997 were $367,356 and $631,921,
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.
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The Company's consolidated financial statements do not contain a
provision for income tax expense due to net operating losses 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
March 31, 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.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenues for the three months ended March 31, 1998 and 1997.
Three Months Ended
------------------
3/31/98 3/31/97
------- -------
Revenues 100.0% 100.0%
Cost of sales 84.6% 137.3%
------- -------
Gross margin 15.4% (37.3)%
Operating expenses:
Sales and marketing 389.2% 687.8%
General and administrative 512.2% 897.8%
Research and development 288.7% 572.3%
------- -------
Total operating expense 1,190.1% 2,157.9%
Interest income, net 4.1% 37.5%
------- -------
Net loss (1,170.6%) (2,157.7%)
------- -------
Provisions for preferred stock 322.4% 0.0%
------- -------
Net loss applicable to holders of common stock (1,493.0%) (2,157.7%)
======= =======
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THREE MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. Revenues for the three months ended March 31, 1998 were
$127,227, an increase of $16,801, or 15.2%, compared to $110,426 for the three
months ended March 31, 1997. Product revenues for the three months ended March
31, 1998 were $127,227, an increase of $31,801 or 33.3%, compared to $95,426 for
the corresponding period in 1997. The increase in product revenues for the three
months ended March 31, 1997 was related to the higher number of 133P Systems
that were sold during that period, compared to the lower number of 486 and 586
Systems that were sold in the corresponding period in 1997. Consulting and
license revenues for the three months ended March 31, 1998 were $0, 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 March
31, 1998 was $107,571, a decrease of $43,990, or 29.0%, compared to $151,561 for
the three months ended March 31, 1997. During the three months ended March 31,
1997, a charge was incurred of approximately $105,000 to reduce the carrying
value of the computing unit for the 486 System to estimated market value. This
was offset by an increase in cost of goods sold during the three months ended
March 31, 1998 related to increased product sales.
SALES AND MARKETING. Sales and marketing expenses for the three months
ended March 31, 1998 were $495,105, a decrease of $264,435, or 34.8%, compared
to $759,540 for three months ended March 31, 1997. The 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. General and administrative expenses for the
three months ended March 31, 1998 were $651,680, a decrease of $339,731, or
34.3%, compared with $991,411 for the three months ended March 31, 1997. This
decrease resulted primarily from a reduction in personnel and related occupancy
expenses, along with a decrease in travel expenses.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three months ended March 31, 1998 were $367,356, a decrease of $264,565, or
41.9%, compared with $631,921 for the three months ended March 31, 1997. This
decrease resulted primarily from reduced activity and related expense given the
substantial completion of development for the head-mounted display and the
body-worn computing unit for the 133P, and the sharing of development expenses
for the Mobile Assistant IV System with the Company's development and
manufacturing partners.
INTEREST INCOME, NET. Net interest income for the three months ended
March 31, 1998 was $5,164, a decrease of $36,192, or 87.5%, compared with
$41,356 for the three months ended March 31, 1997. This decrease is primarily
the result of lower average monthly cash balances during the
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three months ended March 31, 1998 versus those during the three months ended
March 31, 1997 which were higher as a result of remaining proceeds from the
Company's Initial Public Offering that was completed in July 1996.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED
STOCK. The Company's Series A Preferred Stock was issued on June 30, 1997 and
accrues dividends at 5% per annum on the outstanding principal amount, payable
in cash or in Common Stock. The Company issued 3,000 shares of Series B
Preferred Stock on November 11, 1997 and 1,000 shares of Series B Preferred
Stock on January 22, 1998, and accrues dividends at 4% per annum on the
outstanding principal amount, payable in cash or in Common Stock. For the three
months ended March 31,1998, the amount of accrued dividend was $35,902, with no
comparable item for the three months ended March 31, 1997. In accordance with
the Emerging Issues Task Force report from the Securities and Exchange
Commission 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 Preferred Stock and Series B Preferred Stock,
representing the beneficial conversion feature contained in those offerings and
which will be accreted quarterly as portions of these preferred stock issues
become convertible into Common Stock. The amount of this accretion for the three
months ended March 31, 1998 was $374,225, with no comparable item for the three
months ended March 31, 1997.
NET LOSS ATTRIBUTABLE TO HOLDERS OF COMMON STOCK. As a result of the
factors described above, the net loss attributable to Common Stock for the three
months ended March 31, 1998 was $1,899,448, a decrease of $483,203, or 20.3%,
compared to $2,382,651 for the three months ended March 31, 1997. Although the
Company was subject to taxation during the three months ended March 31, 1998 and
1997, the Company incurred net losses during these periods and no provision for
income 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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$2,762,000 after related expenses. The Series A Preferred Stock has a stated
value of $1,000 per share and a holder of the Series A 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 A Preferred Stock. The Series A
Preferred provides the Company with several redemption options and alternatively
allows for the periodic conversion of portions of unredeemed Series A Preferred
Stock over a one-year period ending June 30, 1998. Any Series A Preferred Stock
outstanding on June 30, 1999 must be converted into Common Stock at that date.
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 January 22, 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 $875,000 after related expenses. The Series B
Preferred Stock has a stated value of $1,000 per share and a holder of the
Series B Preferred Stock is entitled to receive, if and when declared by the
Company, a dividend equal to 4% of the stated value per share per annum, payable
in shares of Common Stock or in cash, payable upon conversion of the Series B
Preferred Stock into Common Stock. The Series B Preferred Stock into Common
Stock also provides the Company with several redemption options and allows for
the period conversion of portions of unredeemed Series B Preferred Stock over a
five-month period from closing.
In April 1998, the Company entered into an equity line of credit
agreement in which the Company received an initial gross amount of $1,000,000 in
exchange for Common Stock, and realized cash proceeds of approximately $974,000
after related expenses. Under this line of equity the Company has the right to
obtain up to $10,000,000 in a series of installments based on terms and
conditions specified in the line of equity.
For the three months ended March 31, 1998, the Company's operating
activities used cash of $1,338,823. The net use of cash by operations for the
three months ended March 31, 1998 was primarily the result of a $1,489,321 net
loss, offset non-cash charges for stocks and options issued for services of
$55,344, and depreciation and amortization of $55,282. Cash used for investing
activities for the three months ended March 31, 1998 was $112,907, which
included $74,060 in capitalized production costs. Proceeds from the Company's
financing activities for the three months ended March 31, 1998 were $973,737
which primarily consisted of $945,388 from the issuance of the Company's Series
B Preferred Stock, net of related fees. As a result of the above, cash and cash
equivalents on hand as of March 31, 1998 was $446,024, a decrease of $506,342
from the $952,366 of cash and cash equivalents on hand as of December 31, 1997.
For the three months ended March 31, 1997, the Company's operating
activities used cash of $2,738,571. The net use of cash for the three months
ended March 31, 1997 was primarily the result of a $2,382,651 net loss combined
with $394,187 of cash used by inventories and $182,208 for prepaid and other
assets, offset by non-cash charges for stocks and options issued for services of
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$125,488 and depreciation and amortization of $74,356. Cash used for investing
activities for the three months ended March 31, 1997 was $596,103, which
included $269,964 in capitalized production costs and $262,541 for the
acquisition of property and equipment. Cash used for financing activities for
the three months ended March 31, 1997 was $28,445 that was used for payments on
notes and loans
At March 31, 1998, the Company had no material capital commitments and
working capital of $1,133,104.
On March 19, 1998, Matrix Corporation ("Matrix"),a supplier to the
Company, 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 a contract executed in December 1997 between
the Company and Matrix (the "December Agreement"); that the Company should
return all goods shipped by Matrix under both the December Agreement and a
contract between the Company and Matrix executed in June 1997 (the "June
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.
The consolidated balanch sheet as of December 31, 1997 and 1996 ane the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended, include the report dated March 31, 1998, by
Coopers & Lybrand L.L.P., independent accountants, which includes an explanatory
paragraph concerning the Company's ability to continue as a going concern. 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
14
<PAGE>
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 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
15
<PAGE>
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, 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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS:
27.1 FINANCIAL DATA SCHEDULE
b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months ended March
31, 1998.
17
<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
/s/ JOHN F. MOYNAHAN
-----------------------------------------
John F. Moynahan
Senior Vice President and Chief Financial
Officer
18
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