SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 9, 1999
Common stock - $0.01 par value 23,318,576
<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........9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K.....................19
SIGNATURES.............................................................20
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<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS June 30, 1999 December 31,
(Unaudited) 1998
------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,156,841 $ 924,649
Accounts receivable, net 581,071 229,120
Inventories, net 6,185,678 1,347,668
Prepaid and other current assets 1,077,005 374,243
----------- -----------
Total current assets 10,000,595 2,875,680
----------- ----------
Fixed assets:
Property and equipment, net 826,001 462,384
----------- ----------
Other assets:
Patent costs, net 654,679 560,625
Tooling costs, net 153,527 370,285
Other 127,325 142,614
----------- ----------
Total other assets 935,531 1,073,524
----------- ----------
Total assets $11,762,127 $4,411,588
=========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 4,936,618 1,626,897
Accrued expenses 1,336,033 786,980
Notes and loans payable - 1,250,000
----------- -----------
Total current liabilities 6,272,651 3,663,877
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 6,000,000
shares authorized; 10,694 and 5,430 shares
issued and outstanding as of June 30, 1999
and December 31, 1998, respectively 9,268,965 182,378
Common stock, $.01 par value, 40,000,000
shares authorized; 22,557,655 and 21,359,751
issued and outstanding as of June 30, 1999 and
December 31, 1998, respectively 225,576 213,597
Additional paid-in capital 36,784,785 31,716,067
Accumulated deficit (40,724,247) (31,364,331)
Accumulated other comprehensive loss (65,603) -
Total stockholders' equity 5,489,476 747,711
Total liabilities and stockholders' equity $ 11,762,127 $ 4,411,588
============ ===========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
---- ---- ---- ----
Revenue:
<S> <C> <C> <C> <C>
Product sales and leases $ 635,768 $ 229,634 $ 1,281,544 $ 356,861
Consulting and lice - 1,839 8,387 1,839
------------- ----------- ----------- -----------
Total revenue 635,768 231,473 1,289,931 358,700
Cost of sales 470,164 271,905 1,043,335 379,476
------------- --------- ----------- -----------
Gross profit 165,604 (40,432) 246,596 (20,776)
Operating expenses:
Sales and marketing 2,847,245 656,042 4,757,155 1,151,147
General and administrative 1,645,343 966,199 3,050,194 1,617,879
Research and development 861,555 643,413 1,841,201 1,010,769
------------- ----------- ----------- -----------
Total operating expenses 5,354,143 2,265,654 9,648,550 3,779,795
------------- ----------- ----------- -----------
Operating loss (5,188,539) (2,306,086) (9,401,954) (3,800,571)
Other income, net 40,626 2,902 47,342 8,066
------------- ----------- ----------- -----------
Loss before income taxes (5,147,913) (2,303,184) (9,354,612) (3,792,505)
Provision for income taxes (9,674) 5,304
------------- ----------- ----------- -----------
Net loss (5,138,239) (2,303,184) (9,359,916) (3,792,505)
Provision for preferred stock
dividends 86,315 20,657 103,507 56,559
Provision for accretion on
preferred stock beneficial
conversion feature 705,871 533,264 804,943 907,489
------------- ----------- ------------ ------------
Net loss applicable to holders
of common stock $(5,930,425) $(2,857,105) $(10,268,366) $(4,756,553)
============= =========== ============= ============
Net loss per common share applicable
To holders of common stock (basic
and diluted) $ (0.27) $ (0.16) $ (0.46) $ (0.31)
Weighted average number of
common shares outstanding
(basic and diluted) 22,263,969 17,343,590 22,187,075 15,516,067
============ =========== ============= ===========
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($9,359,916) ($3,792,505)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 548,025 152,185
Gain on disposal of assets (834) -
Provision for bad debts - (30,697)
Non-cash charges for stock and warrants issued for
services 11,772 82,469
Changes in assets and liabilities:
Inventory (4,289,124) 109,731
Accounts receivable (351,951) 65,101
Prepaid and other current assets (702,762) (65,638)
Tooling - 138,682
Other assets 15,289 (10,528)
Accounts payable, accrued and other expenses 3,757,854 (14,873)
Deferred revenue 23,929 -
--------------- --------------
Net cash used in operating activities (10,347,718) (3,366,073)
Cash flows from investing activities:
Sale of property and equipment 834 -
Acquisition of property and equipment, net (693,087) (33,515)
Acquisition of patents and related costs (186,972) (91,190)
Capitalization of tooling costs (457,765) (74,060)
--------------- --------------
Net cash used in investing activities (1,336,990) (198,765)
--------------- --------------
Cash flows from financing activities: Proceeds from/(payments for):
Preferred stock offerings, net 10,875,701 1,348,496
Common stock offerings, net 3,356,802 5,307,048
Notes and loans (1,250,000) (19,530)
Other - (8,819)
--------------- ---------------
Net cash provided by investing activities 12,982,503 6,627,195
Effect of exchange rate changes on cash
and cash equivalents (65,603) -
--------------- ---------------
Net increase in cash and cash equivalents 1,232,192 3,062,357
Cash and cash equivalents, beginning of period 924,649 952,366
--------------- ---------------
Cash and cash equivalents, end of period $ 2,156,841 $ 4,014,723
--------------- ---------------
Supplemental disclosure of cash flow information: $ 1,483 $ 2,500
=============== ==============
Cash paid during the period for interest
Supplemental disclosure of non-cash financing activities:
Common stock issued for preferred stock dividend requirements $ 18,058 $ 84,022
=============== ==============
Common stock issued for services rendered $ 11,772 $ 98,438
=============== ==============
Provision for preferred stock dividend requirements $ 103,507 $ 56,559
=============== ==============
</TABLE>
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<PAGE>
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 and six months ended June 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. 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., 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 loss was
$65,603 for the six months ended June 30, 1999 and consists entirely of foreign
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
plans to adopt SFAS 133 for the year ending December 31, 2000.
4. FINANCINGS
As of June 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
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
-6-
<PAGE>
Preferred Stock for gross proceeds of $1,000,000. As of December 31, 1998, all
Series A and 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 has a 5%
cumulative dividend which is payable in cash or through the issuance of common
stock. The Series C Preferred Stock converts into shares of common stock by
dividing the amount outstanding by the lesser of $4.00 per share or 100% of the
average market price for the 5 trading days immediately preceding conversion. As
of June 30, 1999, holders of the Series C had 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. An additional
5,000 of Series D Preferred Stock were issued during the quarter ended June 30,
1999 for gross proceeds of $5,000,000 were issued upon effectiveness of a
registration statement covering the resale of the common stock issuable upon
conversion of the Series D Preferred Stock. In addition, for every share of
Series D Preferred Stock purchased, the investors received warrants to purchase
20 shares of common stock. The remaining 500 shares of Series D Preferred Stock
were issued to a finder as compensation in connection with the placement of the
shares. The Series D Preferred Stock have a 5% cumulative dividend which is
payable in cash or through the issuance of common stock. The Series D Preferred
Stock may be converted into shares of common stock in four installments 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. As of June 30, 1999, holders of the Series D Preferred Stock had
converted 1,000 shares into 323,238 shares of common stock.
On May 12, 1999, the Company issued 2,000 shares of Series E Preferred
Stock for gross proceeds of $2,000,000. In addition, for every share of Series E
Preferred Stock purchased, the investor received warrants to purchase 25 shares
of common stock. The remaining 100 shares of Series E Preferred Stock were
issued to a finder as compensation in connection with the placement of the
shares. The Series E Preferred Stock has a 5% cumulative dividend which is
payable in cash or through the issuance of common stock. 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. A registration statement to register
common stock underlying the Series E Preferred Stock has been filed with the SEC
but has not been declared effective. Accordingly, no shares of Series E
Preferred Stock have been converted into common stock and all 2,100 shares were
outstanding as of June 30, 1999. Once this registration statement is declared
effective, holders of the Series E Preferred Stock may convert these securities
into common stock in three or four monthly installments, depending on the price
of the common stock, at 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.
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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<PAGE>
5. LEGAL PROCEEDINGS
On March 19, 1998, Matrix Corporation filed a compliant 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 ("December Agreement");
that the Company should return all goods shipped by Matrix under both the
December Agreement and a prior agreement concluded in June 1997 ("June
Agreement"); that the Company did not intend to comply with the December
Agreement and therefore the governing contract between the two entities should
revert to the June Agreement. In addition, this summons requests that any
damages incurred by Matrix as a result of this purported breach of contract be
trebled. The Company and its legal counsel have 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 Xybernaut has been damaged by
this failure to perform. Matrix is presently seeking damages in excess of
$800,000 and the trial for the case began on August 10, 1999 and was not
concluded at the time of this filing.
6. INVENTORY
Inventory is stated at the lower of cost or market, cost being
determined on a first-in, first-out basis. As of June 30, 1999 and December 31,
1998, the allowance to reduce inventory balances to net realizable value was $0
and $770,557, respectively.
7. SUBSEQUENT EVENTS
On July 19, 1999, 3,846,427 warrants to purchase 5,762,060 shares of
common stock expired pursuant to their terms. These warrants were originally
issued in connection with the Company's initial public offering in July 1996 and
were traded on the Nasdaq system under the ticker symbol "XYBRW."
-8-
<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. 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'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. 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, net of expenses. During the six months ended June 30, 1999, the
Company received cash of $14,232,503 from private placements of its equity
securities, net of expenses.
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 June 30, 1999, the Company derived approximately 100% 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 additional optional components for 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 June 30, 1999, the Company had an accumulated deficit
of $40,724,247. 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 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 will need to conclude additional debt, equity or working capital
financings to fund these negative operating cash flows.
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<PAGE>
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
June 30, 1999 and 1998 were $861,555 and $643,413, 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 June 30, 1999, the Company had approximately
$36,850,000 of net operating loss carry forwards for federal income tax purposes
that begin to expire in 2010. The use of these carryforwards 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 similar 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.
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<PAGE>
As a result of this testing, it was determined that the Company's phone
system was not Y2K compliant. This phone system was already scheduled for
replacement during the second half of 1999 to add capacity, upgrade the
Company's telecommunications capabilities, and allow for better customer
service. Replacement of the existing phone system with one that provides similar
capabilities and is Y2K compliant is estimated to cost between $50,000 and
$75,000. The Company expects to spend approximately $250,000 for the upgraded
phone system and is arranging a leasing facility to finance this purchase.
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 its own Year 2000 Issue. 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'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.
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<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 Six Months Ended
--------------------------- ----------------------------
6/30/99 6/30/98 6/30/99 6/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.9% 117.5% 80.9% 105.8%
--------- --------- -------- --------
Gross margin 26.1% (17.5)% 19.1% (5.8)%
Operating expenses:
Sales & marketing 447.8% 283.4% 368.8% 320.9%
General & administrative 258.8% 417.4% 236.5% 451.0%
Research & development 135.5% 277.9% 142.7% 281.8%
---------- --------- -------- --------
Total operating expense 842.1% 978.7% 748.0% 1,053.7%
Interest income 6.4% 1.3% 3.7% 2.2%
---------- --------- -------- --------
Net loss 809.6%) (995.0%) (725.2%) (1,057.3%)
========== ========= ========= =========
Provisions for preferred stock 124.6% 239.3% 70.4% 268.8%
========== ========== ========= =========
Net loss applicable to holders
of common stock 934.2%) (1,234.3%) (795.6%) (1,326.1%)
=========== ========== ========= =========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
REVENUES. Revenues for the quarter ended June 30, 1999 were $635,768,
an increase of $404,295, or 175%, compared to $231,473 for the corresponding
period in 1998. The increase in product revenues for the quarter ended June 30,
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) units that were sold in the
corresponding period in 1998. Consulting revenues for the quarter ended June 30,
1999 were $0, a decrease of $1,839, compared to $1,839 for the corresponding
period in 1998.
COST OF SALES. The cost of sales for the quarter ended June 30, 1999
was $470,164, an increase of $198,259, or 73%, compared to $271,905 for the
corresponding period in 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 June 30, 1999 were $2,847,245, an increase of $2,191,203, or 334%,
compared to $656,042 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 June 30, 1999 were $1,645,343, an increase of
$679,144, or 70%, compared to $966,199 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, a
total of $250,000 was accrued in the quarter ending June 30, 1999 for separation
and legal expenses, for which there was no comparable item for the same period
of the prior year.
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<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the quarter ended June 30, 1999 were $861,555, an increase of $218,142, or
34%, compared to $643,413 for the corresponding period in 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 June 30, 1999 was
$40,626, an increase of $37,724, or 1,300%, compared to $2,902 for the
corresponding period in 1998. This increase is primarily the result of a gain
from exchange of assets and interest income, partly offset by interest expense.
PROVISION FOR TAXES. The provision for taxes for the quarter ended June
30, 1999 was a credit of $9,674, compared to no provision for taxes for the
corresponding period in 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 outstanding preferred stock accrues dividends at 5% per annum on
the outstanding principal amount. For the quarter ended June 30, 1999, the
amount of dividends accrued was $86,315, an increase of $65,658 or 318%,
compared to $20,657 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 and accreted in for the quarter
ended June 30, 1999 was $705,871, an increase of $172,607 or 32%, compared to
$533,264 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 the
quarter ended June 30, 1999. 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 June 30, 1999 was $5,930,425, an increase of $3,073,320,
or 108%, compared to $2,857,105 for the corresponding period in 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Total revenues for the six months ended June 30, 1999 were
$1,289,931, an increase of $931,231, or 260%, compared to $358,700 for the
corresponding period in 1998. Product revenues for the six months ended June 30,
1999 were $1,281,544, an increase of $924,683, or 259%, compared to $356,861 for
the corresponding period in 1998. The increase in product revenues for the
quarter ended June 30, 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)
units that were sold in the corresponding period in 1998.
COST OF SALES. The cost of goods sold for the six months ended June 30,
1999 was $1,043,335, an increase of $663,859, or 175%, compared to $379,476 for
the corresponding period in 1998. The cost of goods sold increased
commensurately with the increase in sales.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the six
months ended June 30, 1999 were $4,757,155, an increase of $3,606,008, or 313%,
compared to $1,151,147 for the corresponding period in 1998. The increase
resulted mainly from increases in expenses related to additional marketing and
advertising
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<PAGE>
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 six months ended June 30, 1999 were $3,050,194, an increase of
$1,432,315, or 89%, compared to $1,617,879 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, a
total of $250,000 was accrued in the quarter ending June 30, 1999 for separation
and legal expenses, for which there was no comparable item for the same period
of the prior year.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
for the six months ended June 30, 1999 were $1,841,201, an increase of $830,432,
or 82%, compared to $1,010,769 for the corresponding period in 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 six months ended June 30, 1999
was $47,342, an increase of $39,276, or 488%, compared to $8,066 for the
corresponding period in 1998. This increase is primarily the result of a gain
from exchange of assets and interest income, partly offset by interest expense.
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 six months ended June 30, 1999, the amount
of dividends accrued was $103,507, an increase of $46,948, or 83%, compared to
$56,559 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 recognized and accreted in the six months ended June 30, 1998 was
$804,943, an decrease of $102,546 or 11%, compared to $907,489 for the same
period a year earlier. This decrease was caused by the lower 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 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 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 common stock for the six
months ended June 30, 1999 was $10,268,366, an increase of $5,511,813, or 116%,
compared to $4,756,553 for the corresponding period in 1998. Although the
Company was subject to taxation during the six months ended June 30, 1999 and
the six months ended June 30, 1998, the Company incurred net losses during these
periods and no provision for taxes was made.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until the completion of 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.
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<PAGE>
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 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. As of June 30,
1999, the holders of the Series C Preferred Stock had converted 281.25 of such
shares resulting in the issuance of 72,121 shares of Common Stock.
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. 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 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 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. 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.
-15-
<PAGE>
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 $5.0
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 and realized
gross proceeds of $5.0 million. The Series D Preferred Stock has a 5% cumulative
dividend which is payable in cash or through the issuance of common stock.
Holders of the Series D Preferred Stock can convert their shares into share of
the Company's common stock in four equal monthly installments starting on the
effective date of the registration statement covering the common stock
underlying the Series D Preferred Stock. The conversion price of the common
stock is equal to the average of the lowest three closing bid prices of the
common stock during the twenty trading days prior to conversion. The Series D
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. An additional 5,000 of Series
D Preferred Stock were for gross proceeds of $5,000,000 were issued upon
effectiveness of a registration statement covering the common stock issuable
upon conversion of the Series D Preferred Stock. In addition, the Company issued
warrants to purchase an aggregate of 100,000 shares of the Company's Common
Stock and 500 shares of Series D Preferred Stock to a finder in connection with
the private placement. The warrants have an exercise price of $6.02 and expire
on March 10, 2002. As of June 30, 1999, holders of the Series D Preferred Stock
had converted 1,000 shares into 323,238 shares of common stock.
On May 12, 1999, the Company issued 2,100 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 in cash or through the issuance of common
stock. 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. A
registration statement to register common stock underlying the Series E
Preferred Stock has been filed with the SEC but has not been declared effective.
Accordingly, no shares of Series E Preferred Stock have been converted into
common stock and all 2,100 shares were outstanding as of June 30, 1999. Once
this registration statement is declared effective, holders of the Series E
Preferred Stock may convert these securities into common stock in three or four
monthly installments, depending on the price of the common stock, at 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 Company issued 100
shares of Series E Preferred Stock to a finder in connection with the private
placement.
For the six months ended June 30, 1999, the Company's operating
activities used cash of $10,347,718. This was primarily the result of a
$9,359,916 net loss and a net increase in inventories of $4,289,124, offset by a
net increase in accounts payable of $3,757,854 and depreciation and amortization
of $548,025. Cash used in investing activities for the year ended December 31,
1998 was $1,336,990, which included $457,765 in capitalized tooling costs,
$186,972 related to obtaining and maintaining patents and $693,087 for the
acquisition of property and equipment. Proceeds from the Company's financing
activities for six months ended June, 1999 were $12,982,503, which primarily
consisted of $10,875,701 from the issuance of Series D and Series E Preferred
Stock, $3,356,802 from the issuance of the Company's common 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 June 30, 1999 was
$2,156,841, an increase of $1,232,192 from the $924,949 of cash on hand as of
December 31, 1998.
For the six months ended June 30, 1998, the Company's operating
activities used cash of $3,366,073. The net use of cash for the six months ended
June 30, 1998 was primarily the result of a $3,792,505 net loss, offset by
depreciation and amortization of $152,185. Cash used for investing activities
for the six months ended June 30, 1998
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<PAGE>
was $198,765, which included $74,060 in capitalized tooling costs and $37,529
for the acquisition of property and equipment. Cash provided by financing
activities for the six months ended June 30, 1998 was $6,627,195.
At June 30, 1999, 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 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.
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<PAGE>
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 the outstanding shares of common stock at that time.
Given the levels of gross revenues and losses for the six months ended
June 30, 1999, the Company's management believes that it is likely that the
Company's gross revenues and allowable losses will not meet the 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.
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<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
June 30, 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XYBERNAUT CORPORATION
/s/ Edward G. Newman
-------------------------------------
By: Edward G. Newman
President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001013148
<NAME> Xybernaut Corporation
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<PERIOD-TYPE> 6-MOS
<CASH> 2,156,841
<SECURITIES> 0
<RECEIVABLES> 581,071
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<INVENTORY> 6,185,678
<CURRENT-ASSETS> 10,000,595
<PP&E> 826,001
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<CURRENT-LIABILITIES> 6,272,651
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0
9,268,965
<OTHER-SE> 36,784,785
<TOTAL-LIABILITY-AND-EQUITY> 11,762,127
<SALES> 635,768
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<OTHER-EXPENSES> 5,313,517
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<INCOME-PRETAX> (5,147,913)
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