SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1999 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)
(703) 631-6925
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 November 11, 1999
Common stock - $0.01 par value 27,899,406
<PAGE>
INDEX
PAGE
----
COVER PAGE................................................................. 1
INDEX...................................................................... 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets (unaudited)...................... 3
Consolidated Statements of Operations (unaudited)............ 4
Consolidated Statements of Cash Flows (unaudited)............ 5
Notes to Consolidated Financial Statements................... 6
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition................ 10
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K......................... 17
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS September 30, 1999 December 31,
(Unaudited) 1998
------------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 299,415 $ 924,649
Accounts receivable, net 623,424 229,120
Inventories, net 6,420,562 1,347,668
Prepaid and other current assets 889,317 374,243
----------- -----------
Total current assets 8,232,718 2,875,680
----------- -----------
Fixed assets:
Property and equipment, net 854,799 462,384
----------- -----------
Other assets:
Patent costs, net 718,183 560,625
Tooling costs, net 263,109 370,285
Other 224,109 142,614
----------- ----------
Total other assets 1,205,401 1,073,524
----------- ----------
Total assets $ 10,292,918 $ 4,411,588
=========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,717,650 $ 1,626,897
Accrued expenses 2,695,555 786,980
Notes and loans payable 140,000 1,250,000
----------- ----------
Total liabilities 7,553,205 3,663,877
----------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 6,000,000 shares authorized; 8,600 and
5,430 shares issued and outstanding as of September 30,
1999 and December 31, 1998, respectively 7,881,209 182,378
Common stock, $.01 par value, 40,000,000 shares authorized;
23,734,892 and 21,359,751 shares issued and outstanding as of
September 30, 1999 and December 31, 1998, respectively 237,349 213,597
Additional paid-in capital 39,125,763 31,716,067
Accumulated deficit (44,608,501) (31,364,331)
Accumulated other comprehensive gain 103,893 -
----------- -----------
Total stockholders' equity 2,739,713 747,711
----------- -----------
Total liabilities and stockholders' equity $ 10,292,918 $ 4,411,588
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Product sales and leases $ 794,508 $ 259,043 $ 2,076,052 615,904
Consulting and license 13,227 - 21,614 1,839
------------- ---------- ----------- -----------
Total revenue 807,735 259,043 2,097,666 617,743
Cost of sales 650,182 794,793 1,693,517 1,174,269
------------- ---------- ----------- ----------
Gross profit (loss) 157,553 (535,750) 404,149 (556,526)
Operating expenses:
Sales and marketing 1,831,147 934,513 6,588,302 2,085,660
General and administrative 1,836,700 1,181,938 4,886,894 2,799,817
Research and development 343,012 851,712 2,184,213 1,862,481
------------------ ---------- ---------- ----------
Total operating expenses 4,010,859 2,968,163 13,659,409 6,747,958
------------------ ---------- ---------- ----------
Operating loss (3,853,306) (3,503,913) (13,255,260) (7,304,484)
Other income, net 18,884 23,638 66,226 31,705
------------- ---------- ---------- ----------
Loss before income taxes (3,834,422) (3,480,275) (13,189,034) (7,272,779)
Provision for income taxes 49,832 - 55,136 -
------------ ---------- ---------- ----------
Net loss (3,884,254) (3,480,275) (13,244,170) (7,272,779)
Provision for preferred stock
dividends 125,949 3,235 229,456 59,794
Provision for accretion on
preferred stock beneficial
conversion feature 574,861 - 1,379,804 907,489
----------- ---------- ---------- ----------
Net loss applicable to holders
of common stock $ (4,585,064) $(3,483,510) $(14,853,430) $(8,240,062)
=========== ========== ========== ==========
Net loss per common share applicable
to holders of common stock (basic
and diluted) $ (0.20) $ (0.18) $ (0.66) $ (0.49)
============ ========== ========== ==========
Weighted average number of
common shares outstanding
(basic and diluted) 23,283,408 $19,446,119 22,545,253 16,840,480
=========== ========== ========== ==========
The accompanying notes are an integral part of these
consolidated financial statements
</TABLE>
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<PAGE>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
1999 1998
------------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(13,244,170) $(7,272,779)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 992,427 331,866
Gain on disposal of assets (834) (5,892)
Provision for write-down of inventory - 320,000
Provision for bad debts 50,000 (18,697)
Non-cash charges for property and equipment - 233,097
Non-cash charges for tooling costs - 299,266
Non-cash charges for stock and warrants issued for services 11,772 91,511
Changes in assets and liabilities:
Inventories (4,310,575) 220,961
Accounts receivable (269,570) (21,265)
Prepaid and other current assets (495,047) (362,907)
Other assets (55,951) (37,733)
Accounts payable and accrued expenses 4,510,499 (162,879)
Deferred revenue 1,810 12,833
------------ -----------
Net cash used in operating activities (12,809,639) (6,372,618)
------------ -----------
Cash flows from investing activities:
Sale of property and equipment 834 28,312
Acquisition of property and equipment, net (861,103) (103,750)
Acquisition of patent costs (350,239) (202,715)
Capitalization of tooling costs (814,851) (114,524)
------------ -----------
Net cash used in investing activities (2,025,359) (392,677)
------------ -----------
Cash flows from financing activities:
Preferred stock offerings, net 11,845,509 1,348,496
Common stock offerings, net 3,456,802 5,307,048
Notes and loans (1,110,000) (19,530)
Other - (8,819)
------------ -----------
Net cash provided by financing activities 14,192,311 6,627,195
------------ -----------
Effect of exchange rate changes on cash and cash equivalents 17,453 -
------------ -----------
Net decrease in cash and cash equivalents (625,234) (138,100)
Cash and cash equivalents, beginning of period 924,649 952,366
------------ -----------
Cash and cash equivalents, end of period $ 299,415 $ 814,266
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 1,483 $ 2,526
============ ===========
Cash paid during the period for income taxes $ 9,419 $ -
============ ===========
Supplemental disclosure of non-cash financing activities:
Common stock issued for preferred stock dividend requirements $ 65,934 $ 85,266
============ ===========
Common stock and warrants issued for services rendered $ 11,772 $ 98,438
============ ===========
Provision for preferred stock dividend requirements $ 229,456 $ 59,794
============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
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<PAGE>
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIC OF PRESENTATION
The accompanying unaudited, consolidated financial statements of
Xybernaut Corporation (the "Company") 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, these
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of Company management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
reflected in such financial statements. Please refer to the Annual Report on
Form 10-KSB for the complete financial statements. Results of operations for the
three months and nine months ended September 30, 1999 are not necessarily
indicative of results of operations expected for the full year ending December
31, 1999. The Company's fiscal year ends December 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the
Company and those of the Company's wholly-owned subsidiaries, Tech International
of Virginia Inc. ("Tech Virginia"), Xybernaut KK and Xybernaut GmbH. All
material intercompany accounts and transactions have been eliminated.
The Company recognizes revenues to end-users upon shipment pursuant to
a valid purchase order ("sell-to accounting"). Shipments to distributors are
accounted for using "sell-through accounting," under which revenue is recognized
when the distributor ships to an end-user, until such time as an adequate
history of shipments and returns from distributors can be developed to allow for
revenue to be recognized upon shipment offset by an allowance for returns.
Shipments to distributors are treated as revenue upon shipment only if shipped
pursuant to a separate purchase order that stipulates that the products are for
demonstration or testing by the distributor and that the obligation to pay is
binding and not subject to contingencies.
3. NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS 130
establishes standards for reporting comprehensive income in a full set of
general purpose financial statements either in the statement of operations or in
a separate statement. The Company's comprehensive gain was $103,893 for the nine
months ended September 30, 1999 and consists entirely of foreign currency
translation adjustments.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 is
effective for fiscal years beginning after June 15, 2000. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Currently, the Company does not utilize derivative instruments.
Therefore, the adoption of SFAS 133 is not expected to have a significant effect
on the Company's results of operations or its financial position. The Company
plans to adopt SFAS 133 for the year ending December 31, 2001.
4. FINANCINGS
As of September 30, 1999, the Company had 6,000,000 shares of
authorized Preferred Stock of which 3,000, 4,180, 375, 10,500, and 2,100 shares
had been designated as Convertible Preferred Stock Series A, B, C, D, and E,
respectively ("Series A, B, C, D and E Preferred Stock"). Under the terms of the
Company's Certificate of Incorporation, the Board of Directors may determine the
rights, preferences, and terms of the Company's authorized but unissued shares
of Preferred Stock.
-6-
<PAGE>
On June 30, 1997, the Company issued 3,000 shares of Series A Preferred
Stock for gross proceeds of $3,000,000. These shares were eligible for
conversion into common stock as follows: 25% at September 28, 1997, 25% at
January 1, 1998, 25% at April 1, 1998 and the final 25% at July 1, 1998. The
Series A Preferred Stock was eligible for conversion at the lesser of 82% of the
average five closing bid prices prior to conversion or $3.50. The closing bid
price of the common stock on June 29, 1997 was $2.75. As of December 31, 1998,
all Series A Preferred Stock had been converted into 1,958,981 shares of common
stock, which included payment of all accrued dividends.
On November 12, 1997, the Company issued 3,180 shares of Series B
Preferred Stock for gross proceeds of $3,180,000. In 1998, the Company issued an
additional 1,000 shares of Series B Preferred Stock with identical terms for an
additional gross proceeds of $1,000,000. These shares were eligible for
conversion into common stock as follows: 25% at February 10, 1998, 25% at March
12, 1998, 25% at April 13, 1998 and the final 25% at May 11, 1998. The Series B
Preferred Stock was eligible for conversion at the lesser of 85% of the average
five closing bid prices prior to conversion, or $2.75. The closing bid price of
the common stock on November 11, 1997 was $2.875. As of December 31, 1998, all
Series B Preferred Stock had been converted into 3,172,239 shares of common
stock, which included payment of all accrued dividends.
On May 22, 1998, the Company issued 375 shares of Series C Preferred
Stock for gross proceeds of $375,000. These shares were eligible for conversion
into common stock as follows: 25% at August 15, 1998, 25% at November 14, 1998,
25% at February 15, 1999 and the final 25% at May 15, 1999. The Series C
Preferred Stock was eligible for conversion at the lesser of 100% of the average
five closing bid prices prior to conversion or $4.00. The closing bid price of
the common stock on May 21, 1997 was $6.00. The closing bid price of the common
stock on June 29, 1997 was $As of September 30, 1999, all Series C Preferred
Stock had been converted into 165,230 shares of common stock, which included
payment of all accrued dividends.
On March 10, 1999, the Company issued the first tranche of 5,000 shares
of the Company's Series D Preferred Stock, par value $0.01 per share, for gross
proceeds of $5,000,000. An additional 5,000 shares of Series D Preferred Stock
were issued upon the effectiveness of a registration statement covering the
resale of the common stock issuable upon conversion of the Series D Preferred
Stock for gross proceeds of $5,000,000. In connection with these issuances, the
investors received warrants to purchase 20 shares of common stock for each share
of Series D Preferred Stock purchased. The warrants have an exercise price of
$6.09 per share and a term of three years. The Series D Preferred Stock has a 5%
cumulative dividend which is payable, in cash or through the issuance of common
stock, upon the conversion of the Series D Preferred Stock into common stock.
The Series D Preferred Stock were eligible for conversion in four monthly
installments starting on May 17, 1999, the effective date of the registration
statement covering resale of the common stock underlying the Series D Preferred
Stock. The Series D Preferred Stock may be converted into shares of common stock
by dividing the dollar amount of Series D Preferred Stock outstanding by the
lesser of 100% of the average of the three lowest closing bids for the common
stock during the twenty trading days prior to conversion or $4.875, the closing
bid price of the common stock on the trading day immediately preceding the
closing date of this private placement. The Company may redeem the Series D
Preferred Stock at any time for a premium to face value that varies depending on
the timing of redemption. In connection with this private placement, the Company
also issued an additional 500 shares of Series D Preferred Stock to a finder,
which shares are expected to be cancelled and replaced by cash or equity, or a
combination thereof. As of September 30, 1999, holders of the Series D Preferred
Stock had converted 4,000 shares into 2,022,366 shares of common stock, which
included payment of all accrued dividends on these 4,000 shares of Series D
Preferred Stock.
On May 12, 1999, the Company issued 2,000 shares of Series E Preferred
Stock, par value $0.01 per share, for gross proceeds of $2,000,000. In
connection with this issuance, the investor received warrants to purchase a
total of 50,000 shares of common stock. The warrants have an exercise price of
$4.648 per share and a term of three years. The Series E Preferred Stock has a
5% cumulative dividend which is payable, in cash or through the issuance of
common stock, upon the conversion of the Series E Preferred Stock. The Company
may redeem the Series E Preferred Stock at any time at a premium to face value
that varies depending on the timing of the redemption, as long as the price of
the common stock is above certain levels. The Series E Preferred Stock were
eligible for conversion into common stock in three or four equal monthly
installments, depending on the trading volume of the common stock, starting on
September 9, 1999.
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<PAGE>
Holders of the Series E Preferred Stock may convert these securities into shares
of common stock at the lesser of 94% of the average of the three lowest closing
bids for the common stock during the twenty trading days prior to conversion, or
$3.719, the closing bid price of the common stock on the trading day immediately
preceding the closing date of this private placement. A registration statement
to register the common stock underlying the Series E Preferred Stock has been
filed with the SEC but has not been declared effective. An additional 100 shares
of Series E Preferred Stock were issued to a finder in connection with this
private placement, which shares are expected to be cancelled and replaced by
cash or equity, or acombination thereof. As of September 30, 1999, no shares of
Series E Preferred Stock had been converted into common stock.
The Company's preferred stock issues have included nondetachable
conversion features that are considered to be "in the money" at the date of
issuance (a "beneficial conversion feature"). The beneficial conversion feature
was recognized as a return to the preferred stockholders over the minimum period
in which the preferred stockholders could realize the maximum beneficial
conversion. As a result of the accumulated deficit, the value of the preferred
stock was not allocated between par value and additional paid-in capital and the
accretion of the value allocated to the beneficial conversion on the preferred
stock and the related dividends is recorded against additional paid-in capital.
In August 1999, the Company entered into a financing agreement with a
lender under which the Company receives 80% of an accounts receivable balance
upon presentation to the lender of certain documentation supporting the
underlying sale. The Company receives the remaining 20%, net of a fee paid to
the lender, upon collection of the original accounts receivable balance. Initial
placement fees associated with this facility total $60,000, of which $43,333 was
paid during the three months ended September 30, 1999, and are being amortized
over the five month period ending December 31, 1999.
On September 21, 1999, the Company completed a $100,000 private
placement of common stock in which 135,000 restricted shares, as defined in Rule
144 promulgated under the Securities Act, were issued.
5. ESCROWED SHARES
As a condition to the Company's initial public offering (the "IPO"), a
representative of the several underwriters required certain of the Company's
stockholders to deposit a total of 1,800,000 shares of common stock (the
"Escrowed Shares") in escrow pursuant to an escrow agreement.
The Escrowed Shares were to be released over a three-year period 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 equaled or exceeded
certain per share targets or if the Company's stock price exceeded a certain per
share target price. If such targets were not met, certain amounts of the
Escrowed Shares were to be returned to the Company and canceled.
The Company did not meet the targets for escrow release for the periods
ending September 30, 1997, 1998 or 1999. As a result, 300,000, 750,000 and
750,000 shares of common stock were canceled from the escrow pool at the end of
each of these periods, respectively, resulting in a reduction of 2.1%, 3.6%, and
3.1%, respectively, of the outstanding shares of common stock.
Since the Company has reported losses, the loss per share 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.
6. LEGAL PROCEEDINGS
On March 19, 1998, Matrix Corporation ("Matrix") filed a complaint
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
an agreement between the two companies concluded in December 1997 (the "December
Agreement"); and that the Company should return all goods shipped by Matrix
under both the December Agreement and a prior agreement concluded in June 1997
(the "June Agreement"). The Company and its legal counsel filed a counterclaim
against Matrix stating that Matrix failed to perform to the requirements of both
the June Agreement and the December Agreement and that the Company has been
damaged by this failure to perform. The trial for the case was completed in
August 1999 and on September 22, 1999 the District Court rendered a judgment
against the Company, under which the Company is required to pay Matrix
approximately $800,000 plus pre-judgment interest calculated as specified in the
judgment. On or about October 21, 1999, Matrix filed an appeal from that part of
the judgment that denied certain additional relief to Matrix.
-8-
<PAGE>
On October 27, 1999, the Company filed a cross appeal of the judgment and made
an application to stay enforcement of the judgment pending the conclusion of the
appellate proceedings, which application is currently pending before the
District Court. On or about November 2, 1999, Matrix filed an application to
withdraw its appeal from judgment. This application is currently pending before
the District Court. The Company accrued $200,000 and $600,000 during the three
months ended June 30, 1999 and September 30, 1999, respectively, related to this
legal proceeding. During the three months ended September 30, 1999, the Company
accrued $150,000 in legal fees incurred in connection with this lawsuit. These
amounts are included in the Company's general and administrative expenses in the
related periods.
7. INVENTORY
Inventory is stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. On a periodic basis, management
evaluates the carrying value of inventory. As of September 30, 1999 and December
31, 1998, the allowance to reduce inventory balances to net realizable value was
$0 and $770,557, respectively.
8. SUBSEQUENT EVENTS
In October 1999, the investors converted an additional 2,000 shares of
Series D Preferred Stock, along with related dividends, into 2,037,033 shares of
common stock.
In October 1999 and November 1999, the Series E Preferred Stock
investor converted all of its 2,000 shares of Series E Preferred Stock, along
with related dividends, into 1,627,481 shares of common stock
In November 1999, the Company issued 500,000 shares of its common stock
to certain investors who exercised warrants granted in connection with the
establishment of an equity line of credit for gross proceeds of $750,000.
-9-
<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 operations in November 1992 as Computer Products & Services, Inc. to
develop, manufacture and sell mobile computing systems. 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.
The common stock is traded on the NASDAQ SmallCap Market under the ticker symbol
"XYBR." The warrants expired on their own terms on July 19, 1999.
The first product to be commercialized by the Company was 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 used "486" based technology and the most recent model in
this series is the Mobile Assistant IV(R) ("MA IV"), which uses a Pentium
chipset that runs at 200 MHz or 233 MHz. The Company also offers linkAssist
(TM), a software product that provides a "windows" style graphical user
interface with speech navigation that allows data stored in almost any format,
such as commonly-used word processing, spreadsheet, data base, graphics or media
files, to be linked to virtually any application without altering the original
data. In addition to these products, the Company offers services to its
customers for the design and use of information systems, primarily in
conjunction with applications using the Company's wearable computers. The
Company also has a license to Data Disk storage technology that allows up to 80
Mb of compressed data to be stored on a durable device the size of a "dogtag."
Since inception, the Company has financed its operations primarily
through private and public sales of equity securities, and to a lesser extent,
cash generated from operations. In 1998 and 1997, the Company received cash of
$10,426,622 and $5,710,406, respectively, from private placements of its equity
securities, net of expenses. During the nine months ended September 30, 1999,
the Company received $15,302,311 from private placements of its equity
securities, net of expenses.
The Company derives its revenues from sales of the Mobile Assistant(R)
Series, consulting services related to the Mobile Assistant(R), application
software for the Mobile Assistant(R), and other computer platforms. In the
quarter ended September 30, 1999, the Company derived approximately 98% of its
revenues from sales of the Mobile Assistant(R). In the future, the Company
expects to derive additional revenues from licensing its intellectual property,
services, the sale of software, and sales of additional optional components of
the Mobile Assistant(R) Series. Cost of sales include the cost of components for
the Mobile Assistant(R) Series, direct labor, direct materials, overhead
allocations, inventory obsolescence charges, amortization of tooling costs and
shipping costs.
The Company has incurred operating losses throughout 1999 and expects
such losses to continue in the near term as it expands its product development
and marketing efforts. At September 30, 1999, the Company had an accumulated
deficit of $44,608,501. The achievement of profitability is primarily dependent
upon the continued development and commercial acceptance of the Company's
products, the successful management of the business and management's ability to
strategically focus the Company and minimize operating expenses. There can be no
assurance as to whether or when profitable operations will occur. In addition,
the Company is experiencing negative cash flow from operations and it is
expected that it will continue to experience negative operating cash flows
through 1999 and for a period of time thereafter. The Company will need to
conclude additional debt, equity or working capital financings to fund these
negative operating cash flows.
The Company's independent accountant's report on its financial
statements as of and for the years ended December 31, 1998 and 1997 contains an
explanatory paragraph that the Company's historical operating losses and limited
capital resources raise substantial doubt about its ability to continue as a
going concern. The Company may require substantial additional funds in the
future, and there can be no assurance that the independent accountant's report
on
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<PAGE>
the Company's future financial statements will not include a similar explanatory
paragraph if the Company is unable to raise sufficient funds or generate
sufficient cash from operations to cover the costs of its operations.
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 ("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 shipped its linkAssist(TM) software during
1997, 1998, and 1999. Costs eligible for capitalization under SFAS 86 were
immaterial during these periods and were not capitalized. Research and
development expenses for the nine months ended September 30, 1999 and 1998 were
$2,184,213 and $1,862,481, respectively, none of which were capitalized.
The Company's consolidated financial statements, for all periods
presented, include the results of operations of Tech Virginia, Xybernaut KK and
Xybernaut GmbH. The consolidated financial statements contain eliminations for
all material transactions between the Company and its wholly-owned subsidiaries
for all periods presented.
The Company's consolidated financial statements contain a provision for
income tax expense for its operations outside the United States, but there is no
provision for income tax expense related to the Company's operations in the
United States due to net operating losses incurred since inception. Subject to
realization, the Company has generated net operating losses that can be used to
offset U.S. taxable operating income in the future. At September 30, 1999, the
Company had approximately $40,000,000 of net operating loss carry forwards for
federal income tax purposes that begin to expire in 2010. The use of these carry
forwards may be limited in any one year under Internal Revenue Code Section 382
if significant ownership changes occur.
DISCLOSURE REGARDING YEAR 2000 COMPLIANCE
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in normal business activities.
The Company utilized both internal and external resources to test,
reprogram or replace, as needed, its computing and communications hardware and
software for Year 2000 modifications. Based on this evaluation, the Company has
made modifications to its computer systems and determined that these systems
will properly utilize dates beyond December 31, 1999 and, as such, are compliant
with the Year 2000 Issue ("Y2K compliant"). The Company has determined that the
Mobile Assistant IV is Y2K compliant.
As a result of this testing, it was determined that the Company's phone
system was not Y2K compliant. Replacement or modification of the existing phone
system to provide similar capabilities and Y2K compliance is estimated to cost
between $50,000 and $75,000. Outside of the phone system, the cost to the
Company of testing and modifying its computer systems to obtain Y2K compliance
was less than $10,000 in the aggregate.
The Company has contacted all of its significant suppliers and large
customers to determine the possible effect on its operations of their inability
or failure to remediate their own Year 2000 Issues. The Company cannot guarantee
that the systems of other companies on which its systems rely will be timely
converted, or that a failure to convert by another company, or a conversion that
is incompatible with the Company's systems, would not have material adverse
effect on its operations. The Company's estimates of the date of completion and
cost of its Year 2000 project are based on its best estimates, which it derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors.
-11-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth items from the Consolidated Statements
of Operations as a percentage of revenues:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- ------------------------
9/30/99 9/30/98 9/30/99 9/30/98
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 80.5% 306.8% 80.7% 190.1%
--------- --------- --------- ---------
Gross margin 19.5% (206.8%) 19.3% (90.1%)
Operating expenses:
Sales & marketing 226.7% 360.7% 314.1% 337.6%
General & administrative 227.4% 456.3% 233.0% 453.2%
Research & development 42.5% 328.8% 104.1% 301.5%
--------- --------- ---------- ---------
Total operating expenses 496.6% 1,145.8% 651.2% 1,092.3%
Other income and income taxes (3.8%) 9.1% 0.5% 5.1%
--------- --------- ---------- ---------
Net loss (480.9%) (1,343.5%) (631.4%) (1,177.3%)
========= ========= ========== =========
Provisions for preferred stock 86.8% 1.2% 76.7% 156.6%
========= ========= ========== =========
Net loss applicable to holders
of common stock (567.7%) (1,344.8%) (708.1%) (1,333.9%)
========= ========= ========== =========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
REVENUES. Revenues for the quarter ended September 30, 1999 were
$807,735, an increase of $548,692, or 212%, compared to $259,043 for the
corresponding period in 1998. The increase in revenues for the quarter ended
September 30, 1999 was primarily related to the higher number of sales of the MA
IV in the 1999 period compared to the lower number of sales of older-generation
Mobile Assistant(R) units in the corresponding 1998 period.
COST OF SALES. The cost of sales for the quarter ended September 30,
1999 was $650,182, a decrease of $144,611, or 18%, compared to $794,793 in the
corresponding period in 1998. The cost of goods sold decreased because of higher
margins on the MA IV compared to the margins on the older-generation Mobile
Assistant (R) sold prior to the introduction of the MA IV and because of
approximately $480,000 in non-cash charges recorded in the quarter ended
September 30, 1998 to write-down certain inventories and to write-off certain
capitalized tooling costs for which there was no comparable item for the same
period of the current year.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the
quarter ended September 30, 1999 were $1,831,147, an increase of $896,634, or
96%, compared to $934,513 for the corresponding period in 1998. The increase
resulted mainly from increases in expenses related to additional marketing and
advertising programs to support the launch of the MA IV, personnel and
infrastructure costs to support sales, marketing and customer service, and
expenses related to the Company's subsidiaries in Germany and Japan.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the quarter ended September 30, 1999 were $1,836,700, an increase
of $654,762, or 55%, compared to $1,181,938 for the corresponding period in
1998. This increase was caused by an accrual of approximately $900,000 for legal
expenses and judgments, for which there was no comparable item for the same
period of the prior year. Without this accrual, general and administrative
expenses were $936,700 for the quarter, a decrease of $245,238, or 21%, compared
to $1,181,938 for the corresponding period in 1998. This decrease is primarily
the result of the Company's continued efforts to reduce operating expenses
commensurate with revenue levels.
-12-
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the quarter ended September 30, 1999 were $343,012, a decrease of $508,700,
or 60%, compared to $851,712 for the corresponding period in 1998. This decrease
is the result of both the significant expenditures made during the quarter ended
September 30, 1998 related to the research and development efforts for the MA IV
without any comparable expenses for new product development in the quarter ended
September 30, 1999, and the use of technology and production partners to fund
development and non-recurring engineering costs during the quarter ended
September 30, 1999. These results are consistent with the Company's objective of
funding basic product development and having its manufacturing partners fund the
detailed product development and manufacturing setup costs.
OTHER INCOME, NET. Other income for the quarter ended September 30,
1999 was $18,884, a decrease of $4,754, or 20%, compared to $23,638 for the
corresponding period in 1998. This decrease is primarily the result of gains
from exchange of assets and interest income, partly offset by interest expense.
PROVISION FOR TAXES. The provision for taxes for the quarter ended
September 30, 1999 was $49,832, compared to no provision for taxes for the
corresponding period in 1998. This provision is related to the Company's
operations outside of the U.S. There is no provision for income tax expense
related to the Company's operations in the United States due to net operating
losses incurred since inception.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED
STOCK. The Company's outstanding preferred stock accrues dividends at 5% per
annum on the outstanding principal amount. For the quarter ended September 30,
1999, the amount of dividends accrued was $125,949, an increase of $122,714, or
3,793%, compared to $3,235 for the same period of the prior year. 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," the accretion of the beneficial conversion feature
recognized in the quarter ended September 30, 1999 was $574,861, an increase of
$574,861 compared to $0 for the same period a year earlier. This increase was
related to the issuance of the Series D Preferred Stock and Series E Preferred
Stock during 1999 and related accretion. Additional paid-in capital is reduced
by the amount of accretion and preferred stock is increased by the amount of
accretion, resulting in no impact on overall stockholders' equity.
NET LOSS ATTRIBUTABLE TO HOLDERS OF COMMON STOCK. As a result of the
factors described above, the net loss attributable to holders of common stock
for the quarter ended September 30, 1999 was $4,585,064, an increase of
$1,101,554, or 32%, compared to $3,483,510 for the corresponding period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
REVENUES. Revenues for the nine months ended September 30, 1999 were
$2,097,666, an increase of $1,479,923, or 240%, compared to $617,743 for the
nine months ended September 30, 1998. The increase in revenues was primarily
related to the higher number of sales of MA IV units in the nine months ended
September 30, 1999 compared to the lower number of sales of older-generation
Mobile Assistant(R) units in the corresponding 1998 period.
COST OF SALES. The cost of goods sold for the nine months ended
September 30, 1999 was $1,693,517, an increase of $519,248, or 44%, compared to
$1,174,269 for the corresponding period in 1998. The cost of goods sold
increased commensurately with the increase in sales while being offset by
approximately $480,000 in non-recurring charges recorded in the quarter ended
September 30, 1998 to write-down certain inventories and to write-off certain
capitalized tooling costs for which there was no comparable item in the same
period of the current year.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the nine
months ended September 30, 1999 were $6,588,302, an increase of $4,502,642, or
216%, compared to $2,085,660 for the corresponding period in 1998. This increase
resulted mainly from increases in expenses related to additional marketing and
advertising programs to support the launch of the MA IV, personnel and
infrastructure costs to support sales, marketing and customer service, and
expenses related to the Company's subsidiaries in Germany and Japan.
-13-
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the nine months ended September 30, 1999 were $4,886,894, an
increase of $2,087,077, or 75%, compared to $2,799,817 for the corresponding
period in 1998. This increase resulted primarily from increases in personnel and
infrastructure expenses related to the increased business activity and the
establishment and activities of the Company's subsidiaries in Germany and Japan.
In addition, $1,100,000 was accrued for separation and legal expenses during the
nine months ended September 30, 1999, for which there was no comparable item
during the 1998 period. Without this accrual, general and administrative
expenses were $3,786,894 for the quarter, an increase of $987,077, or 35%,
compared to $2,799,817 for the corresponding period in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the nine months ended September 30, 1999 were $2,184,213, an increase of
$321,732, or 17%, compared to $1,862,481 for the corresponding 1998 period. This
increase reflects the Company's research and development efforts for accessories
and improvements to existing products along with future products.
OTHER INCOME, NET. Other income for the nine months ended September 30,
1999 was $66,226, an increase of $34,521, or 109%, compared to $31,705 for the
corresponding period in 1998. This increase is primarily the result of a gain
from exchange of assets and net interest income.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED
STOCK. The Company's preferred stock accrues dividends at 5% per annum on the
outstanding principal amount. For the nine months ended September 30, 1999, the
amount of dividends accrued was $229,456, an increase of $169,662, or 284%,
compared to $59,794 for the same period of the prior year. 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," the accretion of the beneficial conversion feature recognized in the
nine months ended September 30, 1999 was $1,379,804, an increase of $472,315 or
52%, compared to $907,489 for the same period a year earlier. This increase was
caused by the larger beneficial conversion feature related to the issuance of
the Series D Preferred Stock and Series E Preferred Stock during the period,
compared to the value of the beneficial conversion feature attributable to the
other preferred stock outstanding for the corresponding period in 1998.
Additional paid-in capital is reduced by the amount of accretion and preferred
stock is increased by the amount of accretion, resulting in no impact on overall
stockholder's equity.
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 nine
months ended September 30, 1999 was $14,853,430, an increase of $6,613,368, or
80%, compared to $8,240,062 for the corresponding period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through its IPO, the private
sale of its securities, vendor credit, and short-term borrowings from
management, stockholders and others.
On July 18, 1996, the Company completed its IPO and sold 2,415,000
units at a price of $5.50 per unit. Each unit consisted of one share of common
stock and one warrant to purchase a share of common stock at $9.00 (the "Unit").
The warrants expired on their own terms on July 19, 1999. Gross proceeds from
the sale of the Units were $13,282,500 and net proceeds after expenses were
$10,842,487.
In 1997, the Company issued 3,000 and 4,180 shares of Series A and
Series B Preferred Stock, respectively, for gross proceeds of $7,180,000. As of
December 31, 1998, all Series A and Series B Preferred Stock had been converted
into 5,131,223 shares of common stock, which included payment of all dividends.
In April 1998, the Company entered into an equity line of credit
agreement and received an initial gross amount of $1,000,000 in exchange for
common stock. Under this line of equity, the Company had 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 credit.
-14-
<PAGE>
On May 22, 1998, the Company issued 375 shares of Series C Preferred
Stock for gross proceeds of $375,000. As of September 30, 1999, all Series C
Preferred Stock had been converted into 165,230 shares of common stock, which
included payment of all dividends.
In June 1998, the Company completed a $1,000,000 private placement of
common stock in which 153,846 restricted shares, as defined in Rule 144
promulgated under the Securities Act, were issued at a price of $6.50 per share.
In June 1998, the Company amended and exercised a put option in the
aggregate principal amount of $3,000,000 under the April 1998 private equity
line of credit agreement mentioned above. In connection with such action, the
Company issued 545,454 shares of common stock. Such shares were subject to
restrictions on resale for a period of nine months and to repricing upon
occurrences of certain conditions. Subsequent to that time, the Company issued
an additional 94,004 shares upon the occurrence of certain repricing events.
In October 1998, the Company entered into a financing agreement with an
investor pursuant to which the Company sold $2,600,000 of common stock to this
investor during the period from October 8, 1998 to November 12, 1998. The
Company issued 593,201 shares of common stock at prices ranging from $4.04 to
$5.72 under this financing agreement.
In November 1998, the Company entered into a financing agreement with
an investor pursuant to which the Company sold $1,595,000 of common stock to
this investor. The Company issued 290,000 shares of common stock at $5.50 per
share under this financing agreement. Such shares were subject to repricing
under certain circumstances. Subsequent to that time, the Company issued an
additional 150,000 shares upon the occurrence of certain repricing events.
On December 17, 1998, the Company borrowed $1,250,000 from two
financial institutions. The maturity date of the debt was January 29, 1999 and
interest was at 12% per annum. On January 29, 1999, the Company repaid the debt.
In January 1999, the Company exercised separate put options in the
aggregate amount of $3,360,000 under the April 1998 private equity line of
credit agreement mentioned above. In connection with such put options, the
Company issued 841,356 shares of common stock at prices ranging from $4.08 to
$4.46.
On March 10, 1999, the Company completed the first tranche of 5,000
shares of the Company's Series D Preferred Stock, par value $0.01 per share, for
gross proceeds of $5,000,000. An additional 5,000 shares of Series D Preferred
Stock were issued upon the effectiveness of a registration statement covering
the resale of the common stock issuable upon conversion of the Series D
Preferred Stock for gross proceeds of $5,000,000. In connection with these
issuances, the investors received warrants to purchase 20 shares of common stock
for each share of Series D Preferred Stock purchased. The warrants have an
exercise price of $6.09 per share and a term of three years. The Series D
Preferred Stock has a 5% cumulative dividend which is payable, in cash or
through the issuance of common stock, upon the conversion of the Series D
Preferred Stock into common stock. The Series D Preferred Stock were eligible
for conversion in four monthly installments starting on May 17, 1999, the
effective date of the registration statement covering resale of the common stock
underlying the Series D Preferred Stock. The Series D Preferred Stock may be
converted into shares of common stock by dividing the dollar amount of Series D
Preferred Stock outstanding by the lesser of 100% of the average of the three
lowest closing bids for the common stock during the twenty trading days prior to
conversion or $4.875, the closing bid price of the common stock on the trading
day immediately preceding the closing date of this private placement. The
Company may redeem the Series D Preferred Stock at any time for a premium to
face value that varies depending on the timing of redemption. In connection with
this private placement, the Company also issued 500 shares of Series D Preferred
Stock to a finder. As of September 30, 1999, holders of the Series D Preferred
Stock had converted 4,000 shares into 2,022,366 shares of common stock, which
included payment of all accrued dividends. Between September 30, 1999 and
November 11, 1999, holders of the Series D Preferred Stock converted an
additional 2,000 shares into 2,037,033 shares of common stock, which included
payment of all accrued dividends, leaving 4,500 shares of Series D Preferred
Stock outstanding as of this date. Of these outstanding shares, 500 shares were
issued to the finder in connection with this private placement and are expected
to be cancelled and replaced by cash or equity, or a combination thereof.
On May 12, 1999, the Company issued 2,000 shares of Series E Preferred
Stock, par value $0.01 per share, for gross proceeds of $2,000,000. In
connection with this issuance, the investor received warrants to purchase a
total of 50,000 shares of common stock. The warrants have an exercise price of
$4.648 per share and a term of three years. The
-15-
<PAGE>
Series E Preferred Stock has a 5% cumulative dividend which is payable,
in cash or through the issuance of common stock, upon the conversion of the
Series E Preferred Stock. The Company may redeem the Series E Preferred Stock at
any time at a premium to face value that varies depending on the timing of the
redemption, as long as the price of the common stock is above certain levels.
The Series E Preferred Stock were eligible for conversion into common stock in
three or four equal monthly installments, depending on the trading volume of the
common stock, starting on September 9, 1999. Holders of the Series E Preferred
Stock may convert these securities into shares of common stock at the lesser of
94% of the average of the three lowest closing bids for the common stock during
the twenty trading days prior to conversion or $3.719, the closing bid price of
the common stock on the trading day immediately preceding the closing date of
this private placement. A registration statement to register the common stock
underlying the Series E Preferred Stock has been filed with the SEC but has not
been declared effective. An additional 100 shares of Series E Preferred Stock
were issued to a finder in connection with this private placement. As of
September 30, 1999, no shares of Series E Preferred Stock had been converted
into common stock. Between September 30, 1999 and November 11, 1999, holders of
the Series E Preferred Stock converted 2,000 shares into 1,627,481 shares of
common stock, leaving 100 shares of Series E Preferred Stock outstanding as of
this date. These 100 shares of Series E Preferred Stock were issued to a finder
in connection with this private placement and are expected to be cancelled and
replaced by cash or equity, or a combination thereof.
In August 1999, the Company entered into a financing agreement with a
lender under which the Company receives 80% of an accounts receivable balance
upon presentation to the lender of certain documentation supporting the
underlying sale. The Company receives the remaining 20%, net of a fee paid to
the lender, upon collection of the original accounts receivable balance. Initial
placement fees associated with this facility total $60,000, of which $43,333 was
paid during the three months ended September 30, 1999, and are being amortized
over the five month period ending December 31, 1999.
On September 21, 1999, the Company completed a $100,000 private
placement of common stock in which 135,000 restricted shares, as defined in Rule
144 promulgated under the Securities Act, were issued.
For the nine months ended September 30, 1999, the Company's operating
activities used cash of $12,809,639. This was primarily the result of a
$13,244,170 net loss and a net increase in inventories of $4,310,575, offset by
a net increase in accounts payable of $4,510,499 and depreciation and
amortization of $992,427. Cash used in investing activities for the nine months
ended September 30, 1999 was $2,025,359, which included $814,851 in capitalized
tooling costs, $350,239 related to the acquisition of patents and $861,103 for
the acquisition of property and equipment. Proceeds from the Company's financing
activities for nine months ended September 30, 1999 were $14,192,311, which
primarily consisted of proceeds of $11,845,509 from the issuance of Series D and
Series E Preferred Stock, $3,456,802 from the issuance of the Company's common
stock, both net of related fees, offset by net repayment of $1,110,000 for notes
and loans. As a result of the above, cash and cash equivalents on hand as of
September 30, 1999 was $299,415, a decrease of $625,234 from the $924,649 of
cash on hand as of December 31, 1998.
For the nine months ended September 30, 1998, the Company's operating
activities used cash of $6,372,618. This net use of cash for the nine months
ended September 30, 1998 was primarily the result of a $7,272,779 net loss,
offset by non-cash charges and depreciation and amortization of $1,184,229. Cash
used for investing activities for the nine months ended September 30, 1998 was
$392,677 and was primarily related to acquisition of property and equipment,
patents, and tooling costs. Cash provided by financing activities for the nine
months ended September 30, 1998 was $6,627,195, which primarily consisted of net
proceeds of $1,348,496 and $5,307,048 from the issuance of the Company's
preferred and common stock, respectively.
At September 30, 1999, the Company had informal agreements with several
of its suppliers to take shipments of additional inventory of parts and
components during the first half of 2000. While the timing and amount of these
shipments may be adjusted, the total amount of inventory and related payment
under these agreements could be approximately as much as $1,500,000 to
$2,000,000.
The Company anticipates that its working capital requirements and
operating expenses will increase as the Company expands sales and production 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 and competitive pressures on gross margins will impact
the magnitude and timing of the Company's cash requirements. In addition to cash
requirements for future business activities,
-16-
<PAGE>
the Company had accounts payable and accrued expenses of $7,413,205 as of
September 30, 1999, the majority of which relates to the purchase of inventory
and portions of which are past due. Management is currently exploring financing
alternatives to supplement the Company's cash position. Potential sources of
additional financing include private equity financings, mergers, strategic
investments, strategic partnerships or various forms of debt financings. In
addition, the Company is formulating a program to reduce operating expenses
commensurate with anticipated revenues, but there can be no assurance that it
will be able to do so. If additional funds are raised by the Company through the
issuance of equity securities, the percentage of ownership of the then current
stockholders of the Company will be reduced. The Company's management believes
that the combination of cash on hand and outside funding will provide sufficient
liquidity to meet the Company's ongoing cash requirements. However, there can be
no assurance that the Company can or will obtain sufficient funds from
operations or from closing additional financings on terms acceptable to the
Company.
The Company's independent accountant's report on its financial
statements as of and for the years ended December 31, 1998 and 1997 contains an
explanatory paragraph that the Company's historical operating losses and limited
capital resources raise substantial doubt about its ability to continue as a
going concern. The Company may require substantial additional funds in the
future, and there can be no assurance that the independent accountant's report
on the Company's future financial statements will not include a similar
explanatory paragraph if the Company is unable to raise sufficient funds or
generate sufficient cash from operations to cover the costs of its operations.
-17-
<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
On September 17, 1999, the Company filed a Report on Form 8-K dated
September 13, 1999 which disclosed a change in the Company's certifying
accountants.
-18-
<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
/s/ Edward G. Newman
---------------------------------------------
By: Edward G. Newman
President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001013148
<NAME> XYBERNAUT CORPORATION
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 299
<SECURITIES> 0
<RECEIVABLES> 714
<ALLOWANCES> 91
<INVENTORY> 6,421
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<COMMON> 237
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7,881
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<TOTAL-LIABILITY-AND-EQUITY> 10,293
<SALES> 2,076
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