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 March 31, 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)
Registrant's telephone number, including area code: (703) 631-6925
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
-- --
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES____ NO_____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest date.
Class Outstanding at May 14, 1999
Common stock - $0.01 par value 22,229,747
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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 Conditions............9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K..........................18
SIGNATURES..................................................................19
2
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XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS March 31, 1999 December 31,
(Unaudited) 1998
--------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,933,210 $ 924,649
Accounts receivable, net 718,483 229,120
Inventories, net 3,959,072 1,347,668
Prepaid and other current assets 673,409 374,243
----------- -----------
Total current assets 7,284,174 2,875,680
----------- -----------
Fixed assets:
Property and equipment, net 597,050 462,384
----------- -----------
Other assets:
Patent costs, net 566,385 560,625
Tooling costs, net 455,155 370,285
Other 137,837 142,614
----------- -----------
Total other assets 1,159,377 1,073,524
----------- -----------
Total assets $ 9,040,601 $ 4,411,588
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable $ - $ 1,250,000
Accounts payable 3,231,575 1,626,897
Accrued expenses 1,011,646 786,980
----------- -----------
Total current liabilities 4,243,221 3,663,877
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 6,000,000 shares authorized;
5,093.75 shares issued and outstanding as of March 31, 1999 4,192,731 182,378
Common stock, $.01 par value, 40,000,000 shares authorized;
22,229,747 and 21,359,751 isssued and outstanding as of
March 31, 1999 and December 31, 1998, respectively 222,297 213,597
Additional paid-in capital 36,037,928 31,716,067
Accumulated deficit (35,586,008) (31,364,331)
Accumulated other comprehensive loss (69,568) -
----------- -----------
Total stockholders' equity 4,797,380 747,711
----------- -----------
Total liabilities and stockholders' equity $ 9,040,601 $ 4,411,588
=========== ===========
</TABLE>
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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 $ 645,776 $ 127,227
Consulting and services 8,387 -
----------- ----------
Total revenue 654,163 127,227
Cost of sales 573,171 107,571
----------- ----------
Gross profit 80,992 19,656
Operating expenses:
Sales and marketing 1,909,910 495,105
General and administrative 1,404,851 651,680
Research and development 979,646 367,356
----------- ----------
Total operating expenses 4,294,407 1,514,141
----------- ----------
Operating loss (4,213,415) (1,494,485)
Interest income, net 6,716 5,164
----------- ----------
Loss before income taxes (4,206,699) (1,489,321)
Provision for income taxes 14,978 -
----------- ----------
Net loss (4,221,677) (1,489,321)
Provision for preferred stock dividends 17,192 35,902
Provision for accretion on preferred stock
beneficial conversion feature 99,072 374,225
----------- ----------
Net loss applicable to holders of common stock $(4,337,941) $(1,899,448
----------- ----------
Net loss per common share applicable to
holders of common stock (basic and diluted) $ (0.21) $ (0.13)
============ ===========
Weighted average number of common shares
outstanding (basic and diluted) 17,670,318 12,844,974
------------ ------------
</TABLE>
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Xybernaut Corporation
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1999 1998
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($4,221,677) ($1,489,321)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 230,806 55,282
Gain on disposal of assets (834) -
Provision for bad debts - 25,000
Non-cash charges for stock and warrants issued for
services 11,797 55,344
Changes in assets and liabilities:
Inventory (2,476,954) 18,756
Accounts receivable (489,363) 13,106
Prepaid and other current assets (299,166) 1,929
Other assets 4,777 4,749
Accounts payable and accrued expenses 1,803,259 (23,668)
--------------- ------------------
Net cash used in operating activities (5,437,355) (1,338,823)
--------------- ------------------
Cash flows from investing activities:
Sale of property and equipment 834 -
Acquisition of property and equipment, net (283,587) (1,318)
Acquisition of patents and related costs (50,144) (37,529)
Capitalization of tooling costs (256,823) (74,060)
--------------- ------------------
Net cash used in investing activities (589,720) (112,907)
--------------- ------------------
Cash flows from financing activities: Proceeds from/(payments for):
Preferred stock offerings, net 4,989,970 973,737
Common stock offering, net 3,365,234 -
Notes and loans (1,250,000) (19,530)
Other - (8,819)
--------------- ------------------
Net cash provided by investing activities 7,105,204 945,388
Effect of exchange rate changes on cash
and cash equivalents (69,568) -
--------------- ------------------
Net decrease in cash and cash equivalents 1,008,561 (506,342)
Cash and cash equivalents, beginning of period 924,649 952,366
--------------- ------------------
Cash and cash equivalents, end of period $1,933,210 $446,024
--------------- ------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $1,483 -
--------------- ------------------
Supplemental disclosure of non-cash financing activities:
Common stock issued for settlement of accrued
liabilities $26,085 $26,289
--------------- ------------------
</TABLE>
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XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, 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 ended March 31, 1999 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 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.
3. NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted SFAS No. 130 Reporting Comprehensive
Income. SFAS 130 established 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 income was
$69,568 for the three months ended March 31, 1999 and consists entirely of
foriegn exchange losses.
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, 1999. 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
will adopt SFAS 133 for the year ending December 31, 2000.
4. FINANCINGS
As of March 31, 1999, the Company had 6,000,000 shares of authorized
Preferred Stock of which 3,000, 4,180, 375, 10,000, and 2,000 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
Articles of Incorporation, the Board of Directors may determine the rights,
preferences, and terms of the Company's authorized but unissued shares of
Preferred Stock.
In 1997, the Company issued 3,000 and 3,180 shares of Series A and
Series B Convertible Preferred Stock, respectively, for gross proceeds of
$6,180,000. In 1998, the Company issued an additional 1,000 shares of Series B
Preferred Stock for proceeds of $1,000,000. The Series A and B Preferred Stock
accrued dividends
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at a rate of 5% and 4% per annum, respectively, which were payable in cash or
common stock. As of December 31, 1998, all Series A Series B Preferred Stock had
been converted into common stock and all accrued dividends were paid through the
issuance of common stock.
On May 22, 1998, the Company issued 375 shares of Series C Preferred
Stock for gross proceeds of $375,000. The Series C Preferred Stock have a 5%
cumulative dividend which is payable when and if declared by the Board of
Directors or at the time of conversion into common stock, whichever date is
earliest. At the Company's discretion, dividends can be paid in cash or through
the issuance of common stock. Holders of the Series C Preferred Stock can
convert their shares into shares of the Company's common stock in four equal
increments commencing August 15, 1998, and on the fifteenth day of each third
month thereafter until May 15, 1999. Any remaining outstanding shares of Series
C Preferred Stock convert into common stock on May 15, 2000. The Series C
Preferred Stock converts into shares of common stock by dividing the lesser of
$4.00 per share or 100% of the average market price for the 5 trading days
immediately preceding conversion. As of March 31, 1999, holders of the Series C
converted 281.25 shares into 72,121 shares of common stock.
On March 10, 1999, the Company issued the first tranche of 5,000 shares
of Series D Preferred Stock for gross proceeds of $5,000,000. The second tranche
of 5,000 shares of Series D Preferred Stock may be issued by the Company to the
same investors following the declaration of effectiveness of the registration
statement by the Securities Exchange Commission ("SEC") for the common stock
underlying the Series D Preferred Stock. This registration statement was
declared effective on May 11, 1999. The Series D Preferred Stock have a 5%
cumulative dividend which is payable when and if declared by the Board of
Directors or at the time of conversion into common stock, whichever date is
earliest. The Series D Preferred Stock converts into shares of common stock by
dividing the dollar amount of the preferred stock by the lesser of the price of
the common stock at the time of initial issuance or 100% of the average of the
three lowest closing bids for the common stock during the twenty trading days
prior to conversion. The Series D Preferred Stock may be redeemed by the Company
at any time for a premium to face value that varies depending on the timing of
redemption.
On May 12, 1999, the Company issued 2,000 shares of Series E Preferred
Stock for gross proceeds of $2,000,000. The Series E Preferred Stock has a 5%
cumulative dividend which is payable when and if declared by the Board of
Directors or at the time of conversion into common stock, whichever date is
earliest. At the Company's discretion, dividends can be paid in cash or through
the issuance of common stock. Holders of the Series E Preferred Stock can
convert their shares into share of the Company's common stock in three or four
equal monthly installments, depending on the price of the stock, starting on the
effective date of the registration statement covering the common stock
underlying the Series E Preferred Stock. The conversion price of the common
stock is a six percent discount from the average of the lowest closing bid
prices of the common stock during the twenty trading days prior to conversion.
The Series E Preferred Stock can be redeemed by the Company 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.
These Preferred Stock issues included a nondetachable conversion
feature that is considered to be "in the money" at the date of issue (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.
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5. LEGAL PROCEEDINGS
On March 19, 1998, Matrix Corporation (see "Key Suppliers") filed a
summons against the Company in the United States District Court, Eastern
District of North Carolina, alleging that: Matrix has been damaged by a
purported breach of the December Agreement by the Company; that the Company
should return all goods shipped by Matrix under both the June Agreement and the
December Agreement; that the Company did not intend to comply with the December
Agreement and therefore the governing contract between the two entities should
revert to the June Agreement. In addition, this summons requests that any
damages incurred by Matrix as a result of this purported breach of contract be
trebled. The Company and its legal counsel have initiated a thorough review of
these allegations and intend to file a counterclaim against Matrix stating that
Matrix failed to perform to the requirements of both the June Agreement and the
December Agreement and that Xybernaut has been damaged by this failure to
perform. While there can be no assurance of the outcome of this legal
proceeding, the Company believes that the ultimate resolution of this litigation
will not have a material adverse effect on the Company's results of operations
or financial position. 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.
6. INVENTORY
Inventory is stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. As of March 31, 1999 and December 31,
1998, the allowance to reduce inventory balances to net realizable value was $0
and $770,557, respectively.
7. SUBSEQUENT EVENT
On May 12, 1999 the Company issued 2,000 shares of Series E Preferred
Stock for gross proceeds of $2,000,000 (see footnote 4 for additional
information).
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<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. 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 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's linkAssist (TM) is a
software product that provides a "windows" style graphical user interface with
speech navigation that allows data stored in almost any format, such as
commonly-used word processing, spreadsheet, data base, graphics or media files,
to be linked to most any application without altering the original data. The
Company's webAssist(TM) is a software product that allows voice navigation of
HTML document links such as those found on the World Wide Web and Intranets.
WebAssist (TM) is currently being reviewed for potential changes in the software
code used for voice recognition. In addition to these products, the Company
offers services to its customers for the design and use of information systems,
mostly 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. From January 1, 1999 to May 14, 1999 the Company received cash of
$10,252,470 from private placements of its equity securities.
The Company has derived its revenues from sales of the Mobile
Assistant(R) Series, consulting services related to the Mobile Assistant(R), and
application software for the Mobile Assistant(R), and other computer platforms.
In the quarter ended March 31, 1999, the Company derived approximately 99% of
its revenues from sales of the Mobile Assistant(R), including fees related to
licensing agreements, and 1% of its revenues from consulting services. 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.
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 1998 and expects
such losses to continue in the near term as it expands its product development
and marketing capabilities. At March 31, 1999, the Company had an accumulated
deficit of $35,586,008. 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. There can be no assurance as to
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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
potentially thereafter.
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.
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 86 were immaterial during this period and
were not capitalized. Such costs were immaterial in 1998 and are expected to be
immaterial in 1999. Research and development expenses for the quarters ended
March 31, 1999 and 1998 were $979,646 and $367,356, 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 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. The Company's future
operations, if profitable, will be subject to income tax expense not previously
incurred by the Company. At March 31, 1999, the Company had approximately
$31,715,000 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.
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 similar normal business activities.
Based on a recent assessment, the Company has determined that it will
be required to modify or replace portions of our software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
believes that it can mitigate the Year 2000 Issue with modifications to existing
software and conversions to new software. However, if the Company fails to make
such modifications and conversions, or if
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it does not make them on a timely basis, the Year 2000 Issue could have a
material impact on its operations.
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 its own Year 2000 Issue. Its estimate of the costs to
remediate the Year 2000 issue is based on presently available information.
However, the Company cannot guarantee that the systems of other companies on
which it systems relies will be timely converted, or that a failure to convert
by another company, or a conversion that is incompatible with our systems, would
not have material adverse effect on its operations. The Company has no exposure
to contingencies related to the Year 2000 Issue for the products we have sold.
The Company utilizes both internal and external resources to reprogram,
or replace, and test the software for Year 2000 modifications. The Company plans
to complete the Year 2000 project within three months and it estimates the total
remaining cost of the Year 2000 project at $6,000. Approximately $1,700 of the
total project cost is attributable to the purchase of new software, which will
be capitalized. The remaining $4,300, which will be expensed as incurred over
the next six months, is not expected to have a material effect on its results of
operations. To date, the Company has incurred and expensed approximately $1,000
related to its Year 2000 project.
The Company's estimates of the date of completion and cost of our 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. The costs
and completion date of its Year 2000 project could differ materially from our
estimates due to the lack of availability and cost of personnel trained in this
area, our ability to locate and correct all relevant computer codes, and similar
uncertainties.
RESULTS OF OPERATIONS
The following table sets forth items from the Consolidated Statements
of Operations as a percentage of revenues:
THREE MONTHS ENDED MARCH 31
---------------------------
1999 1998
---- ----
Revenue 100.0% 100.0%
Cost of sales 87.6% 84.6%
------ ------
Gross profit 12.4% 15.4%
Operating expenses:
Sales and marketing 292.0% 389.2%
General and administrative 214.8% 512.2%
Research and development 149.8% 288.7%
------ -------
Total operating expenses 656.6% 1190.1%
------ -------
Operating loss -644.1% -1174.7%
Other income, net 1.0% 4.1%
------- --------
Pretax loss -643.1% -1170.6%
Provision for taxes 2.3% 0.0%
------- --------
Net loss -645.4% -1170.6%
Preferred stock dividends and accretion 17.8% 28.2%
----- -----
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Net loss applicable to holders of common stock -663.2% -1198.8%
THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
REVENUES. Revenues for the quarter ended March 31, 1999 were $654,163,
an increase of $526,936, or 414%, compared to $127,227 for the quarter ended
March 31, 1998. Product revenues for the year ended December 31, 1998 were
$645,776 an increase of $518,549 or 407%, compared to $127,227 for the
corresponding period in 1999. The increase in product revenues for the quarter
ended March 31, 1999 was related to the higher sales of the MA IV in that period
compared to the lower number of older-generation Mobile Assistant(R) that were
sold in the corresponding period in 1998. Consulting revenues for the quarter
ended March 31, 1999 were $8,387, an increase of $8,387, compared to $0 for the
corresponding period in 1998.
COST OF SALES. The cost of sales for the quarter ended March 31, 1999
was $573,171, an increase of $465,600, or 433%, compared to $107,571 for the
quarter ended March 31, 1998. The cost of goods sold increased commensurately
with the increase in product sales.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the
quarter ended March 31, 1999 were $1,909,910, an increase of $1,414,805, or
286%, compared to $495,105 for the quarter ended March 31, 1998. The increase
resulted mainly from increases in expenses related to additional marketing
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 March 31, 1999 were $1,404,851, an increase of
$753,171, or 116%, compared to $651,680 for the quarter ended March 31, 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.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the quarter ended March 31, 1999 were $979,646, an increase of $612,290, or
167%, compared to $367,156 for the quarter ended March 31, 1998. This increase
reflects the Company's ongoing research and development efforts for accessories,
improvements to existing products and for future products.
OTHER INCOME, NET. Other income for the quarter ended March 31, 1999
was $6,716, an increase of $1,552, or 30%, compared to $5,164 for the quarter
ended March 31, 1998. This decrease is primarily the result of lower average
monthly cash balances in the first quarter of 1999 versus those during the same
period a year earlier.
PROVISION FOR TAXES. The provision for taxes for the quarter ended
March 31, 1999 was $14,978, compared to no provision for taxes for the quarter
ended March 31, 1998. This provision is related to the Company's operations in
Germany and Japan. There is no provision for income tax expense related to the
Company's operations in the United States due to net operating losses since
inception.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED
STOCK. The Company's Series A Preferred Stock was issued in June 1997 and
accrued dividends at 5% per annum on the outstanding principal amount. The
Company's Series B Preferred Stock was issued in November 1997 and February 1998
and accrued dividends at 4% per annum on the outstanding principal amount. The
Company's Series C Preferred Stock was issued in May 1998 and accrues dividends
at 5% per annum on the
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outstanding principal amount. The Company's Series D Preferred Stock was issued
in March 1999 and accrues dividends at 5% per annum on the outstanding principal
amount. For the quarter ended March 31, 1999, the amount of dividends was
$17,192, a decrease of $18,710 or 52%, compared to $35,902 for the same period
of the prior year. 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", the value of the beneficial conversion feature was recognized in the
quarter ended March 31, 1998 for the Series A and Series B Preferred Stock, and
for the Series D Preferred Stock in the quarter ended March 31, 1999. The amount
of this accretion for the quarter ended March 31, 1999 was $99,072, an decrease
of $275,153 or 74%, compared to $374,225 for the same period a year earlier.
This decrease was related to the conversion of all of the Company's Series A, B
and C Preferred Stock to common stock as of December 31, 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 the overall
amount of 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 March 31, 1999 was $4,322,963, an increase of $2,423,515
or 128% compared to $1,899,448 for same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until the completion of the IPO, the Company has
financed its operations from the private sale of its securities, from vendor
credit, short-term loans received 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").
Gross proceeds from the sale of the Units were $13,282,500 and net proceeds
after expenses were $10,842,487.
On June 30, 1997, the Company completed a private placement of an
aggregate of 3,000 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 $2,762,000 after related expenses.
The holders of the Series A Preferred Stock converted all such shares resulting
in the issuance of 1,958,984 shares of Common Stock.
On November 12, 1997, the Company completed a private placement of an
aggregate of 3,180 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 $2,949,000 after related expenses.
On February 23, 1998, the Company completed a follow-on placement of its Series
B Preferred and realized gross proceeds of $1,000,000 and net proceeds of
approximately $875,000 after related expenses. The holders of the Series B
Preferred Stock converted all such shares resulting in the issuance of 3,172,239
shares of Common Stock.
In April 1998, the Company entered into an equity line of credit
agreement 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. In
connection with this line of equity, the Company issued five-year warrants to
purchase up to 40,000 shares of stock at $1.76 per share and 20,000 shares of
stock at $2.81 per share at any time starting six months after closing. The
placement agent for this transaction received a cash fee of 5% and 50,000 shares
of unregistered stock.
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<PAGE>
In May 1998, the Company completed a $750,000 private placement of 375
shares of Series C Preferred Stock, par value $0.01 per share ("Series C
Preferred Stock") and 110,294 shares of Common Stock. The Series C Preferred
Stock has a stated value of $1,000 per share. A holder of the Series C Preferred
Stock is entitled to receive, if and when declared, a dividend equal to 5% of
the stated value per share per annum, payable in shares of Common Stock or in
cash, payable upon conversion of the Series C Preferred Stock. The Certificate
of Designation of the Series C Preferred Stock provides the Company with several
redemption options and allows for the conversion of unredeemed Series C
Preferred Stock in 25% increments on August 15, 1998, November 15, 1998,
February 15, 1999, and May 15, 1999. The holders of the Series C Preferred Stock
have converted 187.5 of such shares resulting in the issuance of 47,781 shares
of Common Stock. Any Series C Preferred Stock outstanding on May 15, 2000 must
be converted into Common Stock at that date.
In June 1998, the Company completed a $1,000,000 private placement 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 are subject to
restrictions on resale for a period of nine months and to repricing upon
occurrences of certain conditions. In addition, the Company issued five-year
warrants to purchase up to 300,000 shares of Common Stock at a price of $5.25
per share. Subsequently the Company has 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 the
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 addition, the Company issued three
warrants to purchase up to 12,500 shares of Common Stock each, at prices of
$9.58, $9.09 and $13.05 per share, respectively. These warrants are exercisable
at any time starting six months after the closing and ending five years after
closing. The placement agent for this transaction received a cash fee of 6%.
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 the
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. Subsequently 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. In addition, the Company issued a warrant to purchase 100,000 shares of
Common Stock at an exercise price of $6.00 per share and a warrant to purchase
100,000 shares of Common Stock at an exercise price of $5.50 per share.
-14-
<PAGE>
On March 10, 1999, the Company completed the first tranche of $5.0
million of a $10.0 million private placement of an aggregate of 5,000 shares of
the Company's Series D Preferred Stock, par value $.01 per share (the "Series D
Preferred Stock"), and realized gross proceeds of $5.0 million and net proceeds
of approximately $4,977,000 after related expenses. In addition, the Company
issued warrants to purchase an aggregate of 100,000 shares of the Company's
Common Stock. The warrants have an exercise price equal to 125% of the closing
bid price of the Common Stock on the first trading day immediately preceding the
closing date of the first tranche. The warrants have an exercise period which
ends on the three year anniversary of the issuance date of the warrants.
On May 12, 1999, the Company issued 2,000 shares of Series E Preferred
Stock for gross proceeds of $2,000,000. The Series E Preferred Stock has a 5%
cumulative dividend which is payable when and if declared by the Board of
Directors or at the time of conversion into common stock, whichever date is
earliest. At the Company's discretion, dividends can be paid in cash or through
the issuance of common stock. Holders of the Series E Preferred Stock can
convert their shares into share of the Company's common stock in three or four
equal monthly installments, depending on the price of the stock, starting on the
effective date of the registration statement covering the common stock
underlying the Series E Preferred Stock. The conversion price of the common
stock is a six percent discount from the average of the lowest closing bid
prices of the common stock during the twenty trading days prior to conversion.
The Series E Preferred Stock can be redeemed by the Company 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.
For the three months ended March 31, 1999, the Company's operating
activities used cash of $5,437,355. This was primarily the result of a
$4,221,677 net loss and a net increase in inventories of $2,476,954. These were
offset by a net increase in accounts payable of $1,797,864 and depreciation and
amortization of $230,806. Cash used in investing activities for the year ended
December 31, 1998 was $589,720, which included $256,823 in capitalized tooling
costs, $50,144 related to obtaining and maintaining patents and $283,587 for the
acquisition of property and equipment. Proceeds from the Company's financing
activities for three months ended March 31, 1999 were $7,105,204, which
primarily consisted of $3,365,234 from the issuance of Common Stock, $4,989,970
from the issuance of the Company's Series D Preferred Stock, net of related
fees, offset by repayment of $1,250,000 for notes and loans. As a result of the
above, cash and cash equivalents on hand as of March 31, 1999 was $1,933,210, an
increase of $1,008,561 from the $924,949 of cash on hand as of December 31,
1998.
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
$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 December 31, 1998, the Company had no material capital commitments.
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
-15-
<PAGE>
cash requirements. 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. 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 cash
requirements until at least March 2000. 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.
POSSIBLE NON-CASH FUTURE CHARGE
As a condition to the Company's initial public offering (the "IPO"),
Royce Investment Group, the Representative of the several underwriters (the
"Representative"), 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 with Continental Stock Transfer & Trust Company,
the escrow agent and the Representative. The Escrowed Shares are subject to the
following terms and conditions:
- The Escrowed Shares will be released incrementally over a three-year
period only in the event the Company's gross revenues and earnings
(loss) per share for the 12-month periods ending September 30, 1997,
1998 and 1999 equal or exceed certain gross revenue and earnings (loss)
per share targets.
- If such per share targets are not met in any of the relevant 12-month
periods and the price of the common stock does not meet or exceed
agreed upon price levels, certain amounts of the Escrowed Shares will
be returned to the Company for each period and canceled.
- All the 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.
The difference between the initial offering price and the market value
(at the time of release) of any Escrowed Shares released will be deemed to be an
additional compensation expense. Such expense, depending on the price per share,
may 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 Company did not meet the targets for escrow release for September 30,
1997 and September 30, 1998. As a result, 300,000 and 750,000 shares,
respectively, were canceled from the escrow pool resulting in a reduction of
2.1% and 3.6% of our outstanding shares of common stock.
Given the start of full-scale production and distribution of the MA IV in
early 1999, the Company's management believes that it is likely that the
Company's gross revenues and allowable losses will not meet the
-16-
<PAGE>
Performance Targets of the 12-month period ending September 30, 1999.
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, 1999. If conditions
are not met for release from escrow, then 750,000 shares of stock will be
returned to the Company on September 30, 1999 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.
-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
No reports on form 8-K were filed during the quarterly period ended
March 31, 1999.
-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
-19-
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<NAME> Xybernaut Corporation
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<PERIOD-TYPE> 3-MOS
<CASH> 1,933,210
<SECURITIES> 0
<RECEIVABLES> 809,451
<ALLOWANCES> 90,968
<INVENTORY> 3,959,072
<CURRENT-ASSETS> 7,284,174
<PP&E> 1,342,559
<DEPRECIATION> 745,509
<TOTAL-ASSETS> 9,040,601
<CURRENT-LIABILITIES> 4,243,221
<BONDS> 0
<COMMON> 222,297
0
4,192,731
<OTHER-SE> 382,352
<TOTAL-LIABILITY-AND-EQUITY> 9,040,601
<SALES> 645,776
<TOTAL-REVENUES> 654,163
<CGS> 573,171
<TOTAL-COSTS> 573,171
<OTHER-EXPENSES> 4,294,401
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<INCOME-PRETAX> (4,206,699)
<INCOME-TAX> 14,978
<INCOME-CONTINUING> (4,221,677)
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