1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 2000 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
COMMISSION FILE NUMBER: 0-21013
XYBERNAUT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1799851
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
12701 FAIR LAKES CIRCLE, FAIRFAX, VA 22033
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES WITH ZIP CODE)
(703) 631-6925
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED
SINCE LAST REPORT)
Indicate by check mark whether the registrant:(1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 9, 2000
Common stock - $0.01 par value 38,511,199
2
INDEX
PAGE
----
COVER PAGE............................................................................................ 1
INDEX................................................................................................. 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets (unaudited).................................. 3
Condensed Consolidated Statements of Operations (unaudited)........................ 4
Condensed Consolidated Statements of Cash Flows (unaudited)........................ 5
Notes to Condensed Consolidated Financial Statements............................... 6
Item 2 - Management's Discussion and Analysis of
Results of Operations and Financial Condition...................................... 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk......................... 17
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................................... 17
3
XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS June 30, 2000 December 31, 1999
------------- -----------------
Current assets:
Cash and cash equivalents $ 6,723,260 $ 2,126,000
Accounts receivable, net 3,387,887 1,704,310
Inventory, net 5,571,230 6,081,450
Prepaid and other current assets 1,156,873 635,288
------------ ------------
Total current assets 16,839,250 10,547,048
------------ ------------
Property and equipment, net 701,259 801,310
------------ ------------
Other assets:
Patent costs, net 741,420 703,174
Tooling costs, net 297,351 286,456
Other 306,385 542,691
------------ ------------
Total other assets 1,345,156 1,532,321
------------ ------------
Total assets $ 18,885,665 $ 12,880,679
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,589,202 $ 4,929,010
Accrued expenses and other 2,398,983 2,483,946
Notes and loans payable, net 2,525,880 1,419,958
------------ ------------
Total liabilities 7,514,065 8,832,914
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 6,000,000 shares authorized; 0 and 4,600
shares issued and outstanding as of June 30, 2000 and December 31, 1999,
respectively; (liquidation preference $0 and $4,600,000 at June 30, 2000
and December 31, 1999, respectively) -- 3,996,588
Common stock, $0.01 par value, 80,000,000 shares authorized;
38,511,199 and 30,373,734 shares issued and outstanding as of
June 30, 2000 and December 31, 1999, respectively 385,112 303,737
Additional paid-in capital 69,679,371 47,746,424
Foreign currency translation 2,059 58,541
Accumulated deficit (58,694,942) (48,057,525)
------------ ------------
Total stockholders' equity 11,371,600 4,047,765
------------ ------------
Total liabilities and stockholders' equity $ 18,885,665 $ 12,880,679
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
4
XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Revenue:
Product sales $ 2,125,774 $ 1,128,167 $ 3,616,298 $ 2,077,534
Consulting and other 806,661 1,407,156 1,420,609 2,231,962
------------ ------------ ------------ ------------
Total revenue 2,932,435 2,535,323 5,036,907 4,309,496
Cost of sales 2,025,925 1,765,222 3,582,453 3,107,984
------------ ------------ ------------ ------------
Gross profit 906,510 770,101 1,454,454 1,201,512
Operating expenses:
Sales and marketing 2,858,291 3,152,593 5,959,195 5,322,025
General and administrative 1,399,921 1,761,877 2,835,495 3,274,435
Research and development 1,619,755 861,555 2,209,583 1,841,201
Merger costs 621,048 -- 621,048 --
------------ ------------ ------------ ------------
Total operating expenses 6,499,015 5,776,025 11,625,321 10,437,661
------------ ------------ ------------ ------------
Operating loss (5,592,505) (5,005,924) (10,170,867) (9,236,149)
Interest and other (expense)income, net (258,515) 50,703 (429,349) 65,701
------------ ------------ ------------ ------------
Loss before provision for income taxes (5,851,020) (4,955,221) (10,600,216) (9,170,448)
Provision(benefit) for income taxes 10,992 (9,674) 37,201 5,304
------------ ------------ ------------ ------------
Net loss (5,862,012) (4,945,547) (10,637,417) (9,175,752)
Provision for preferred stock dividends 2,308 86,315 10,438 103,507
Provision for accretion on preferred stock
beneficial conversion feature -- 705,871 -- 804,943
------------ ------------ ------------ ------------
Net loss applicable to holders of common stock $ (5,864,320) $ (5,737,733) $(10,647,855) $(10,084,202)
============ ============ ============ ============
Net loss per common share applicable to
holders of common stock (basic and diluted) $ (0.15) $ (0.25) $ (0.29) $ (0.45)
============ ============ ============ ============
Weighted average number of common shares
outstanding (basic and diluted) 37,898,185 22,693,296 36,659,762 22,616,402
============ ============ ============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Six Months Ended June 30,
------------------------------
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $(10,637,417) $ (9,175,752)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 953,530 604,794
Amortization of note discount 422,332 --
Provision for bad debts 22,794 --
Non-cash charges for equity securities issued for services 891,014 11,772
Changes in assets and liabilities:
Accounts receivable (1,695,232) (640,831)
Inventory 293,026 (4,289,124)
Prepaid and other current assets (658) (738,227)
Other assets 51,110 (94,671)
Accounts payable (2,208,537) 3,698,195
Accrued expenses and other (61,086) 465,178
------------ ------------
Net cash used in operating activities (11,969,124) (10,158,666)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment, net (291,336) (746,512)
Acquisition of patents (168,631) (186,972)
Capitalization of tooling costs and other (58,725) (457,765)
------------ ------------
Net cash used in investing activities (518,692) (1,391,249)
------------ ------------
Cash flows from financing activities:
Preferred stock offerings, net -- 10,875,701
Common stock offerings, net 5,955,867 3,356,802
Notes and loans payable, net 1,604,762 (1,330,341)
Exercise of warrants and options 9,573,630 --
------------ ------------
Net cash provided by financing activities 17,134,259 12,902,162
Effect of exchange rate changes on cash and cash equivalents (49,183) (65,603)
------------ ------------
Net increase in cash and cash equivalents 4,597,260 1,286,644
Cash and cash equivalents, beginning of period 2,126,000 1,052,649
------------ ------------
Cash and cash equivalents, end of period $ 6,723,260 $ 2,339,293
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 52,837 $ 41,621
============ ============
Cash paid for taxes $ 42,293 $ --
============ ============
Supplemental disclosure of non-cash financing activities:
Common stock issued for preferred stock dividend requirements $ 153,904 $ 18,058
============ ============
Provision for preferred stock dividend requirements $ 10,438 $ 103,507
============ ============
Equity securities issued as payment of accounts payable $ 109,740 $ 26,085
============ ============
Charges to conform accounting policies during merger $ 168,365 $ --
============ ============
Common stock issued for services rendered $ 891,014 $ 11,772
============ ============
Equity securities issued for future services $ 453,256 $ --
============ ============
The accompanying notes are an integral part of these
condensed consolidated financial statements
6
XYBERNAUT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements of
Xybernaut Corporation ("Xybernaut" or the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and instructions to Form 10-Q 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, these unaudited
condensed consolidated financial statements reflect all adjustments of a normal
recurring nature necessary to present fairly the financial position of the
Company and its subsidiaries at June 30, 2000 and December 31, 1999, the results
of their operations for the three and six months ended June 30, 2000 and 1999
and of their cash flows for the six months ended June 30, 2000 and 1999. Results
of operations for the three and six months ended June 30, 2000 are not
necessarily indicative of results of operations expected for the full fiscal
year ending December 31, 2000. Please refer to the Company's Annual Report on
Form 10-KSB/A for the complete financial statements.
On April 7, 2000, Xybernaut acquired Selfware, Inc, which subsequently
changed its name to Xybernaut Solutions, Inc. ("Xybernaut Solutions"). The
merger was accounted for as a pooling of interests. All financial data of the
Company, including Xybernaut's previously issued financial statements for the
periods presented in this Form 10-Q, have been restated to include the
historical financial information of Xybernaut Solutions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The condensed consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries: Xybernaut GmbH (Boblingen, Germany),
Xybernaut K.K. (Yokohoma, Japan), Tech Virginia (Fairfax, Virginia, U.S.A.) and
Xybernaut Solutions (Vienna, Virginia, U.S.A). All significant intercompany
accounts and transactions have been eliminated in consolidation. Net gains and
losses resulting from foreign currency transactions have not been material.
The Company recognizes product revenue from a combination of hardware and
software sales. Hardware revenue is recognized upon shipment of the Company's
products to end-users pursuant to binding customer purchase orders. When
shipments are made to distributors, hardware revenue is only recognized upon
ultimate sale by the distributors to end-users or when the distributors are
purchasing product for their own use pursuant to separate binding purchase
orders.
The recognition of software revenue is dependent on the terms and
conditions of the Company's contracts with its customers. Revenue related to
software sales is typically recorded upon shipment of the Company's products to
end-users. Service revenue is recognized ratably over the contractual periods or
as the services are provided. In "time and materials" contracts, revenue is
recognized as billable costs are incurred by the Company. In "percentage of
completion" contracts, revenue is recorded based on the ratio of costs incurred
over total estimated costs to complete.
3. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In 1999, the required
implementation date of SFAS 133 was delayed to fiscal years beginning after June
15, 2000. SFAS 133 requires that all derivative instruments are to 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, but may elect to do so to hedge foreign
currency or other exposures if such exposures become significant. 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 fiscal year ending December 31, 2001.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement changes standards for the
way that public business enterprises identify and report operating segments in
annual and interim financial statements. This statement requires selected
information about an enterprise's operating segments and related disclosure
about products and services, geographic areas and major customers. The Company
adopted this standard for fiscal year end 1999.
7
In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." In 2000, the required implementation date of SAB 101 was delayed to
the fourth quarter of fiscal years beginning after December 15, 1999. SAB 101
provides guidance related to revenue recognition, income statement presentation
and financial disclosures. The adoption of SAB 101 is not expected to have a
significant effect on the Company's results of operations or its financial
position. The Company plans to continue to evaluate the potential impact of SAB
101 and to adopt the pronouncement for the fiscal quarter ended December 31,
2000.
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: an interpretation of APB
Opinion No. 25" ("FIN 44"). FIN 44 provides guidance on how to account for
stock-based compensation, including stock option grants. FIN 44 is effective
July 1, 2000. The Company intends to adopt FIN 44 during the fiscal quarter
ended September 30, 2000. The Company does not expect that the adoption of the
Interpretation will have a significant effect on the Company's results of
operations or its financial position.
4. BUSINESS COMBINATION
On April 7, 2000, the Company acquired Xybernaut Solutions, a provider of
enterprise management services and software for project management, maintenance
and work flow (the "Merger"). Pursuant to the terms of the related Agreement and
Plan of Merger, the value of Xybernaut Solutions was determined at approximately
$8,100,000. Based on a ratio established by the 30-day average closing price for
Xybernaut's common stock prior to closing, the Company exchanged 429,327 shares
of its common stock for all of the stock of Xybernaut Solutions, for an
effective price of $18.97 per share of Xybernaut's common stock. The Merger was
accounted for as a pooling of interests.
The terms of the Merger were determined in arms-length negotiations between
the Company and Xybernaut Solutions and a fairness opinion for the acquisition
was provided to the Company's board of directors by Merrill Lynch. This opinion
covered only the fairness of the exchange ratio for the Merger from a financial
point of view and did not address the merits of the decision to merge with
Xybernaut Solutions or the financial impact of such Merger. Mr. Jacques Rebibo,
former chairman and CEO of Xybernaut Solutions, served on the Company's board of
directors from January 1996 to August 1997 and is currently a vice president of
the Company.
Prior to the Merger, there were no material transactions between Xybernaut
and Xybernaut Solutions in the periods presented in this Form 10-Q. The Company
incurred costs of $621,048 associated with the Merger, consisting of $452,683 in
direct costs, including fees for investment banking, legal, and accounting
services, and $168,365 in charges to conform Xybernaut Solutions's accounting
policies to those of the Company. These expenses have been charged to operations
in the second quarter of 2000, which is the quarter in which the Merger was
consummated.
The following information presents certain income statement data of
Xybernaut and Xybernaut Solutions for the periods preceding the Merger:
For the Three Months For the Three Months For the Six Months
Ended March 31, 2000 Ended June 30, 1999 Ended June 30, 1999
-------------------- -------------------- -------------------
Revenue:
Xybernaut $ 1,498,192 $ 635,768 $ 1,289,931
Xybernaut Solutions 606,280 1,899,555 3,019,565
--------------- --------------- ---------------
$ 2,104,472 $ 2,535,323 $ 4,309,496
=============== =============== ===============
Net Income(Loss):
Xybernaut $ (4,534,762) $ (5,138,239) $ (9,359,916)
Xybernaut Solutions (240,643) 192,692 184,164
--------------- --------------- ---------------
$ (4,775,405) $ (4,945,547) $ (9,175,752)
=============== =============== ===============
5. INVENTORY
Inventory consists primarily of component hardware parts held for resale
and allocated tooling costs and is comprised principally of finished goods.
Inventory is stated at the lower of cost or market, with cost being determined
on a first-in, first-out basis. Management periodically assesses the need to
provide for obsolescence of inventory and adjusts the carrying values of
inventory to their net realizable value when required. As of June 30, 2000 and
December 31, 1999, the allowance to reduce inventory balances to net realizable
value was $120,000.
8
6. FINANCINGS
From 1997 through 1999, the Company issued 3,000, 4,180, 375, 10,500, and
2,100 shares of its series A, B, C, D, and E convertible preferred stock,
respectively ("Series A, B, C, D and E Preferred Stock," respectively).
All shares of the Company's convertible preferred stock had been converted
into shares of its common stock as of June 30, 2000. All shares of the Series A
and Series B Preferred Stock had been converted into shares of common stock as
of December 31, 1998. All shares of the Series C Preferred Stock had been
converted into shares of common stock as of September 30, 1999. All shares of
the Series D Preferred Stock had been converted into shares of common stock as
of June 30, 2000, including 4,500 preferred shares converted into 4,145,197
common shares during the six months ended June 30, 2000. All shares of the
Series E Preferred Stock had been converted into shares of common stock as of
June 30, 2000, including 100 preferred shares converted into 28,233 common
shares during the six months ended June 30, 2000.
The Company's preferred stock issues have included nondetachable conversion
features that were considered to be "in the money" at the date of issuance (a
"beneficial conversion" feature). The beneficial conversion 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 Company's 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.
As of December 31, 1999, all of the value associated with the beneficial
conversion features had been fully accreted against additional paid-in capital.
In January 1999, the Company issued 841,356 shares of its common stock
pursuant to an equity line of credit for cash proceeds of $2,110,000 and for use
as consideration for the repayment of certain notes payable.
On April 22, 1999, Xybernaut Solutions entered into a revolving line of
credit with a bank in the maximum amount of $500,000. The loan proceeds were
used to repay another loan facility and for general working capital purposes.
Interest accrued on this facility at the prime rate plus 1% per annum. At
December 31, 1999, the Company had borrowed $385,704 under this facility. This
facility was fully repaid in June 2000.
On December 2, 1999, the Company entered into a financing facility with
IBM Global Finance (the "IBM Facility"). Under the terms of the IBM Facility,
the Company borrowed $1,000,000 under a term loan secured by inventory and was
extended a $3,000,000 credit line to finance customer purchases. The borrowing
under the term loan accrues interest at up to the prime rate plus 2.5% per
annum. During the six months ended June 30, 2000, the Company repaid all amounts
owed under the term loan. Subsequent to June 30, 2000, the Company entered into
a separate six-month $1,400,000 term loan with IBM Global Finance with similar
terms to the December 2, 1999 facility.
In January 2000, the Company received $2,460,500 in proceeds through the
issuance of 647,500 shares of common stock in a private placement.
In January 2000, the Company borrowed $3,025,000 from several lenders
pursuant to promissory notes that require the Company to repay the borrowings by
January 2001 unless repaid earlier upon a public or private placement of common
stock in excess of $10,000,000. Interest on the notes accrues at 10% per annum.
In connection with these borrowings, the Company issued warrants to purchase
302,500 shares of unregistered common stock at $0.10 per share. Based on the
relative fair values of the securities issued, these warrants were assigned a
value of $921,452, which amount has been recorded as a note discount to be
amortized into interest expense over the one-year lives of the notes. During the
three and six months ended June 30, 2000, the Company recorded amortization of
note discount of $230,363 and $422,332, respectively, related to this debt.
In June 2000, the Company received gross proceeds of $3,500,000 through
the private placement of 437,500 shares of its common stock. The shares of
common stock were sold at $8.00 per share, representing a 12% discount to the
closing bid price of the common stock on the day preceding the transaction.
During the six months ended June 30, 2000, the Company issued equity
securities to certain employees, consultants and companies for services provided
to the Company. These securities included the issuance of shares of common
stock, warrants and options. These transactions were individually valued based
upon the fair value of the securities issued or the services provided, whichever
was more reliably measured. During the three and six months ended June 30, 2000,
the Company recorded general and administrative expenses associated with these
services of $361,842 and $891,014, respectively. At June 30, 2000, an additional
$452,256 was recorded as prepaid expenses to be amortized over the remaining
lives of the underlying service agreements.
During the six months ended June 30, 2000, certain of the Company's
employees and consultants exercised stock options that had been issued pursuant
to the Company's various stock incentive plans. The Company issued 535,334
shares of its common stock and received gross proceeds of $1,298,752 related to
these exercises during this period.
9
During the six months ended June 30, 2000, the Company issued 1,947,700
shares of its common stock to investors who exercised warrants granted in
connection with previous financings for proceeds of $7,582,475. Subsequent to
these exercises, the Company had warrants outstanding at June 30, 2000 to
purchase 290,000 shares of its common stock at prices that range from $2.00 to
$18.00.
7. SEGMENT AND ENTERPRISE WIDE REPORTING
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the fiscal year ended December 31, 1999.
SFAS 131 requires certain financial and supplementary information to be
disclosed on an annual and interim basis of each reportable segment of an
enterprise. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. Operating segments
are defined as components of an enterprise about which separate discrete
financial information is evaluated regularly by the chief operating decision
maker or decision making group, in deciding how to allocate resources and assess
performance.
The financial information disclosed herein materially represents all of
the financial information related to the Company's principal operating segments
as a provider of wearable, full-function computing and communications systems
with hands-free operation and as a supplier of enterprise management services
and software for projects, maintenance and work flow. The Company established
subsidiaries in Germany and Japan in January 1999.
Operations in various geographical areas are summarized as follows:
As of and For the As of and For the
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------- -------------------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
United States:
Total revenue $ 2,275,156 $ 2,297,435 $ 3,500,124 $ 3,756,276
Net loss (5,297,242) (4,173,741) (9,465,247) (7,489,542)
Identifiable assets 13,332,845 10,346,932 13,332,845 10,346,932
Europe:
Total Revenue $ 484,141 $ 145,482 $ 859,504 $ 227,543
Net loss (277,275) (270,857) (721,826) (537,575)
Identifiable assets 996,773 886,731 996,773 886,731
Asia:
Total revenue $ 173,138 $ 92,406 $ 677,279 $ 325,677
Net loss (287,495) (500,848) (450,344) (1,148,635)
Identifiable assets 4,556,047 3,577,003 4,556,047 3,577,003
For the three and six months ended June 30, 2000, one customer comprised
32.0% and 18.6%, respectively, of consolidated revenues and 31.8% of
consolidated accounts receivable as of June 30, 2000. For the three months ended
June 30, 1999, two customers comprised 13.6% and 16.8%, respectively, of
consolidated revenues and, for the six months ended June 30, 1999, one customer
comprised 14.0% of consolidated revenues.
Two of the Company's officers are members of the board of directors of a
company that purchases software products and consulting services from the
Company. The Company recorded revenues on sales to this customer of $159,160
during the three months ended June 30, 2000. A different customer of the Company
provides marketing services to the Company. The Company recorded revenues on
sales of its hardware products to this customer of $42,378 and $252,139 during
the three months ended December 31, 1999 and March 31, 2000, respectively. The
Company recorded $124,455 of expenses related to the marketing services
performed by this customer during both the three months ended March 31, 2000 and
June 30, 2000, respectively. These services were paid through the issuance of
the Company's equity securities.
8. SUBSEQUENT EVENTS
On July 19, 2000, the Company borrowed $1,400,000 from IBM Global Finance
pursuant to a new promissory note. The borrowing is secured by the Company's
equipment, inventory and accounts receivable balances. The borrowing accrues
interest at the prime rate plus 1.5% and is to be repaid in three equal
installments in September and November 2000 and January 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
10
OVERVIEW
Xybernaut Corporation (the "Company") was founded in October 1990 and
commenced operations in November 1992 to develop, manufacture and sell wearable
mobile computing and communications solutions and software. In July 1996, the
Company successfully completed the initial public offering ("IPO") of its common
stock and warrants. The common stock is currently traded on the NASDAQ SmallCap
Market under the ticker symbol "XYBR." In April 2000, the Company applied for
listing on the NASDAQ National Market.
The Company's first commercial product in the Mobile Assistant(R) series of
wearable PCs, the Mobile Assistant I, was introduced in 1994 and used "486"
based technology. The Mobile Assistant II was introduced in January 1997 and
used "586" based technology. The Mobile Assistant III used a Pentium processor
and was introduced during the third quarter of 1997. In the fourth quarter of
1998, the Company commenced production of the fourth system in this product
development program, the Mobile Assistant IV ("MA IV(R)"), which uses a Pentium
chipset known as the "Tillamook."
In April 2000, the Company acquired Selfware, Inc., which subsequently
changed its name to Xybernaut Solutions, Inc. ("Xybernaut Solutions").
Management believes that the merger will better enable the Company to provide
total solutions to the customers of both the Company and Xybernaut Solutions.
The acquisition of Xybernaut Solutions was finalized at a value of $8,100,000
and was accomplished through the exchange of shares of the Company's common
stock for the stock of Xybernaut Solutions, for an effective price of $18.97 per
share of the Company's stock. The transaction was accounted for as a pooling of
interests.
Xybernaut Solutions was founded in 1983 and has over 30 full-time employees
at its headquarters in Vienna, Virginia and at an office in Seattle, Washington.
Xybernaut Solutions's proprietary OPMIST asset management system has been
installed in over 200 sites worldwide at shipyards, utilities, manufacturers,
departments of transportation, military bases and railroads. Among other
alliances, Xybernaut Solutions is a Microsoft Certified Solutions Provider, an
authorized Lotus Notes Provider, an Oracle Program Member and a Sun Catalyst
Partner.
Xybernaut Solutions provides programming capabilities in a variety of
advanced languages including Visual Basic and Visual C++, along with database
experience in Microsoft SQL Server, Oracle and Sybase. Telecommunication and
information technology for asset management are also provided by Xybernaut
Solutions for computers, hubs, routers and data lines, along with asset
management software for linear referenced assets including roads, railways,
utility, and pipelines. Xybernaut Solutions products have been developed for
Windows 95/98, Windows NT, UNIX and Novell Netware.
Additional software products are being developed and are planned for
development for use on the Mobile Assistant and other personal computers. The
Company currently offers linkAssist(TM), a software product which provides a
"windows" style graphical user interface with speech navigation that allows data
stored in almost any format, such as commonly-used word processing, spreadsheet,
data base, graphics or media files, to be linked to virtually any application
without altering the original data.
Since inception, the Company has financed its operations primarily through
private and public sales of equity securities, borrowings, and to a lesser
extent, cash generated from operations. In 1999 and 1998, the Company received
net proceeds of $19,274,177 and $10,677,212, respectively, from private
placements of its equity securities, and $3,736,785 and $1,796,810,
respectively, from borrowings. During the six months ended June 30, 2000 and
1999, the Company received net proceeds of $15,529,497 and $14,232,503,
respectively, from private placements of its equity securities and exercise of
warrants and options, along with proceeds of $3,025,000 and $285,704,
respectively, from borrowings.
Historically, the Company has derived its revenues from sales of its Mobile
Assistant series, software products and consulting services related to these
products. In the future, the Company expects to derive additional revenues from
the licensing of its intellectual property. The Company's cost of sales includes
the costs of components for the Mobile Assistant series, costs of purchased
software, direct labor and materials, inventory obsolescence charges,
amortization of tooling costs and fulfillment and shipping costs.
The Company has incurred operating losses throughout 1999 and 2000 and
expects such losses to continue in the near term as it expands its product
development and marketing efforts. At June 30, 2000, the Company had an
accumulated deficit of $58,694,942. 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 2000 and potentially thereafter. The Company will require additional
capital to execute its business plan. Management believes they will be
successful in their efforts to obtain such financing. If the Company is unable
to obtain sufficient
11
additional financing, it will be required to reduce discretionary spending in
order to maintain its operations at a reduced level. Management believes that it
will be able to reduce discretionary spending if required, but that such
reduction would negatively impact progress on implementing the Company's
business plan.
The Company intends to continue to make significant expenditures on
research and development of additional hardware and software products and has
begun substantial efforts to enhance its current line and to design and engineer
its next generation of wearable products. Research and development activities
relate primarily to the research and design of new products, test components and
equipment costs required to conduct the Company's development activities.
Software development costs are expensed as incurred until technological
feasibility is established in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed," after which any additional costs are
capitalized until the software is ready for release.
The Company's condensed consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries: Xybernaut GmbH
(Boblingen, Germany), Xybernaut K.K. (Yokohoma, Japan), Tech Virginia (Fairfax,
Virginia, U.S.A.) and Xybernaut Solutions (Vienna, Virginia, U.S.A.). The
condensed consolidated financial statements contain eliminations for all
material transactions among the Company and these wholly-owned subsidiaries for
all periods presented.
The Company's condensed consolidated financial statements contain a
provision for income tax expense on its operations outside the United States.
Subject to realization, the Company has generated net operating losses in the
U.S. that can be used to offset domestic 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 December 31, 1999, the
Company had approximately $43,665,000 and $1,100,000 of net operating loss carry
forwards for U.S. federal and foreign income tax purposes, respectively. The
U.S. losses begin to expire in 2010 and the losses from foreign operations do
not expire. The use of the U.S. carryforwards may be limited in any one year
under Internal Revenue Code Section 382 if significant changes in ownership
occur.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenues:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------
2000 1999 2000 1999
------ ------ ------ ------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 69.1% 69.6% 71.1% 72.1%
------ ------ ------ ------
Gross margin 30.9% 30.4% 28.9% 27.9%
Operating expenses:
Sales & marketing 97.5% 124.3% 118.3% 123.5%
General & administrative 47.7% 69.5% 56.3% 76.0%
Research & development 55.2% 34.0% 43.9% 42.7%
Merger costs 21.2% -- 12.3% --
------ ------ ------- ------
Total operating expenses 221.6% 227.8% 230.8% 242.2%
Interest and other, net (8.8%) 2.0% (8.5%) 1.5%
------ ------ ------- ------
Loss before provision for income taxes (199.5%) (195.4%) (210.4%) (212.8%)
Provision for income taxes 0.4% (0.4%) 0.7% 0.1%
------ ------ ------- ------
Net loss (199.9%) (195.0%) (211.1%) (212.9%)
====== ====== ======= ======
Provisions for preferred stock 0.1% 31.2% 0.2% 21.1%
====== ====== ======= ======
Net loss applicable to holders
of common stock (200.0%) (226.2%) (211.3%) (234.0%)
====== ====== ======= ======
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
12
REVENUE. Revenue for the quarter ended June 30, 2000 was $2,932,435, an
increase of $397,112, or 15.7%, compared to $2,535,323 for the corresponding
period in 1999. The increase in revenue was primarily related to higher product
sales of its software and MA IV product line in the second quarter of 2000
compared to the comparable 1999 period. Partially offsetting the increased
product sales was a decrease in consulting and other revenue, resulting
primarily from a few large software contracts for which the Company billed
comparably large consulting revenue during 1999 when compared to 2000.
COST OF SALES. The cost of sales for the quarter ended June 30, 2000 was
$2,025,925, an increase of $260,703, or 14.8%, compared to $1,765,222 in the
corresponding period in 1999. The increase in cost of goods sold corresponded to
the increase in revenues for the same period, resulting in overall gross margins
of 30.9% and 30.4% for the 2000 and 1999 periods, respectively.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the quarter
ended June 30, 2000 were $2,858,291, a decrease of $294,302, or 9.3%, compared
to $3,152,593 for the corresponding period in 1999. This decline was primarily
the result of large selling and advertising expenditures made to support the
launch, of the MA IV during the second quarter of 1999 as compared to the 2000
period, during which a comparable product launch was not made.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended June 30, 2000 were $1,399,921, a decrease of $361,956, or
20.5%, compared to $1,761,877, for the corresponding period in 1999. This
decrease was primarily the result of the Company's efforts to reduce operating
expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the quarter ended June 30, 2000 were $1,619,755, an inc rease of $758,200, or
88.0%, compared to $861,555 for the corresponding period in 1999. This is
primarily the result of increased expenditures in the second quarter of 2000 to
enhance the Company's MA IV product line and to develop daylight readable flat
panel displays and the next generation products. During the comparable period of
1999, significant product development costs were not required because the MA IV
product line had recently been introduced.
MERGER EXPENSES. Merger expenses were $621,048 for the quarter ended June
30, 2000. These non-recurring expenses related to the Company's April 2000
merger with Xybernaut Solutions, for which no comparable expenses were recorded
in other periods. These expenses consist of $452,683 in direct costs, including
fees for investment banking, legal, and accounting services, and $168,365 in
charges to conform Xybernaut Solutions's accounting policies to those of the
Company.
INTEREST AND OTHER INCOME/EXPENSE, NET. Other expense for the quarter ended
June 30, 2000 was $258,515, a decrease of $309,218, or 609.9%, compared to other
income of $50,703 for the corresponding period in 1999. This decrease was
primarily the result of interest expense on new loans and the amortization of
note discount, offset by $78,472 of interest and other income.
PROVISION FOR TAXES. The Company accrued $10,992 for an income tax
provision at June 30, 2000 related to income earned by the Company's foreign
subsidiaries. The Company's U.S. operations had a net loss for the three months
ended June 30, 2000 and, therefore, no provision for U.S. income taxes is
required.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED STOCK.
The Company accrued dividends at 5% per annum on the outstanding principal
amount of its preferred stock. For the quarter ended June 30, 2000, the amount
of dividends accrued was $2,308, a decrease of $84,007, or 97.3%, compared to
$86,315 for the same period of the prior year. This decrease was a direct result
of the reduction of outstanding preferred stock during the 2000 period as
compared to the 1999 period. The accretion of the beneficial conversion feature
of the Company's preferred stock recognized in the quarter ended June 30, 2000
was $0, a decrease of $705,871, or 100%, compared to the same period a year
earlier. This decrease was related to the full accretion of the deemed dividend
during 1999, which represented the minimum period in which the preferred
shareholders could realize the maximum beneficial conversion.
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, 2000 was $5,864,320, an increase of $126,587, or
2.2%, compared to $5,737,733 for the corresponding period in 1999.
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUE. Revenue for the six months ended June 30, 2000 was $5,036,907, an
increase of $727,411, or 16.9%, compared to $4,309,496 for the corresponding
period in 1999. The increase in revenue was primarily related to higher product
sales of its software and MA IV product line in the first half of 2000 compared
to the comparable 1999 period. Partially offsetting the
13
increased product sales was a decrease in consulting and other revenue,
resulting primarily from a few large software contracts for which the Company
billed comparably large consulting revenue during 1999 when compared to 2000.
COST OF SALES. The cost of sales for the six months ended June 30, 2000 was
$3,582,453, an increase of $474,469, or 15.3%, compared to $3,107,984 in the
corresponding period in 1999. The increase in cost of goods sold corresponds to
the increase in sales over the same period, resulting in overall gross margins
of 28.9% and 27.9% for the 2000 and 1999 periods, respectively.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the six
months ended June 30, 2000 were $5,959,195, an increase of $637,170, or 12.0%,
compared to $5,322,025 for the corresponding period in 1999. The increase
resulted mainly from continued expenditures related to marketing and advertising
programs, customer services, personnel, increased operations in the Company's
foreign subsidiaries and other infrastructure costs to position the Company's
product lines during the first half of 2000 compared to the level of
expenditures during the comparable 1999 period.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the six months ended June 30, 2000 were $2,835,495, a decrease of $438,940,
or 13.4%, compared to $3,274,435, for the corresponding period in 1999. This
decrease was primarily the result of the Company's efforts to reduce operating
expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the six months ended June 30, 2000 were $2,209,583, an increase of $368,382, or
20.0%, compared to $1,841,201 for the corresponding period in 1999. This is
primarily the result of increased expenditures in the first half of 2000 to
develop and enhance the Company's MA IV product line, daylight readable flat
panel displays and the next generation products. During the first six months of
1999, research and development expenditures related primarily to hardware and
software for the MA IV product line.
MERGER EXPENSES. Merger expenses were $621,048 for the six months ended
June 30, 2000. These non-recurring expenses related to the Company's April 2000
merger with Xybernaut Solutions, for which no comparable expenses were recorded
in the other periods. These expenses consist of $452,683 in direct costs,
including fees for investment banking, legal, and accounting services, and
$168,365 in charges to conform Xybernaut Solutions's accounting policies to
those of the Company.
INTEREST AND OTHER INCOME/EXPENSE, NET. Other expenses for the six months
ended June 30, 2000 was $429,349, an increase of $495,050, or 753.5%, compared
to other income of $65,701 for the corresponding period in 1999. This decrease
was primarily the result of interest expense on new loans and the amortization
of note discount, offset by approximately $172,579 of interest and other income.
PROVISION FOR TAXES. The Company accrued $37,201 for an income tax
provision at June 30, 2000 related to income earned by the Company's foreign
subsidiaries. The Company's U.S. operations had a net loss for the six months
ended June 30, 2000 and, therefore, no provision for U.S. income taxes was made.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED STOCK.
The Company accrued dividends at 5% per annum on the outstanding principal
amount of its preferred stock. For the six months ended June 30, 2000, the
amount of dividends accrued was $10,438, a decrease of $96,069, or 89.9%,
compared to $103,507 for the same period of the prior year. This decrease was a
direct result of the reduction of outstanding preferred stock during the 2000
period as compared to the 1999 period. The accretion of the beneficial
conversion feature of the Company's preferred stock recognized in the six months
ended June 30, 2000 was $0, a decrease of $804,943, or 100%, compared to the
same period a year earlier. This decrease was related to the full accretion of
the deemed dividend during 1999, which represented the minimum period in which
the preferred shareholders could realize the maximum beneficial conversion.
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 six months ended June 30, 2000 was $10,647,855, an increase of $563,653,
or 5.6%, compared to $10,084,202 for the corresponding period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until the completion of the IPO, the Company financed
its operations through the private sale of its securities, vendor credit,
short-term loans from management, stockholders and others. During and subsequent
to the IPO, the Company has financed its operations from public and private
sales of its common and preferred stock, borrowings from institutions and
management, proceeds from the exercise of warrants and options and sales of its
products and services.
14
On May 22, 1998, the Company issued 375 shares of Series C Preferred Stock
for gross proceeds of $375,000. As of September 30, 1999, all Series C Preferred
Stock had been converted into shares of common stock, which included payment of
all accrued dividends.
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 12% per annum. On January 29, 1999, the Company repaid the principal and
accrued interest.
In January 1999, the Company exercised put options in the aggregate amount
of $3,360,000 under an equity line of credit agreement entered into in April
1998. In connection with such put options, the Company issued 841,356 shares of
common stock at prices ranging from $4.08 to $4.46.
Between March and June 1999, the Company issued 10,500 shares of the
Company's Series D Preferred Stock for gross proceeds of $10,000,000. As of June
30, 2000, all Series D Preferred Stock had been converted into shares of common
stock.
On April 22, 1999, Xybernaut Solutions entered into a revolving line of
credit with a bank in the maximum amount of $500,000. The loan proceeds were
used to repay another loan facility and for general working capital purposes.
Interest accrued on this facility at the prime rate plus 1%. At December 31,
1999, the Company had borrowed $385,704 under this facility. This facility was
fully repaid in June 2000.
On May 12, 1999, the Company issued 2,100 shares of Series E Preferred
Stock, for gross proceeds of $2,000,000. As of June 30, 2000, all Series E
Preferred Stock had been converted into shares of common stock.
On various dates during 1999, the Company borrowed approximately $583,000
from several officers of the Company pursuant to non-interest bearing promissory
notes or loan agreements. All of these borrowings had been repaid at December
31, 1999 except for $10,000, which was repaid in February 2000.
Between August and December 1999, the Company borrowed $456,315 under a
financing agreement in which the Company received 80% of an accounts receivable
balance upon presentation to the lender of certain documentation supporting the
underlying sale and the remaining 20%, net of a fee paid to the lender, upon
collection by the lender of the original accounts receivable balance. All
borrowings were repaid by February 29, 2000.
On September 21, 1999, the Company completed a $100,000 private placement
of common stock in which 135,000 restricted shares, as defined in Rule 144 of
the Securities Act, were issued.
Between October 1999 and December 1999, the Company borrowed $1,000,000
pursuant to a secured promissory note. In connection with this borrowing, the
Company issued warrants to purchase 1,000,000 shares of its common stock at
$1.00 per share. On December 31, 1999, the cashless conversion of these warrants
into 1,000,000 shares of the Company's common stock was used as consideration to
fully repay the loan.
Between October 1999 and December 1999, the Company issued 545,000 shares
of its common stock upon exercise of warrants granted in connection with
previous financings for proceeds of $838,513.
On November 19, 1999, the Company completed a $3,000,000 private placement
of common stock in which 1,000,000 shares were issued.
On December 2, 1999, the Company entered into a financing facility with
IBM Global Finance (the "IBM Facility"). Under the terms of the IBM Facility,
the Company borrowed $1,000,000 under a term loan and was extended a $3,000,000
credit line to finance customer purchases. The borrowing under the term loan
accrued interest at the prime rate plus 2.5% per annum. The term loan borrowing
was repaid in three equal installments in February, April and June 2000.
Subsequent to June 30, 2000, the Company entered into a separate six-month
$1,400,000 term loan with IBM Global Finance with similar terms to the IBM
Facility.
In January 2000, the Company received $2,460,500 in proceeds through the
issuance of 647,500 shares of common stock in a private placement.
In January 2000, the Company borrowed $3,025,000 pursuant to promissory
notes that require the Company to repay the borrowings in January 2001 unless
repaid earlier upon a public or private placement of common stock in excess of
$10,000,000. Interest on the notes accrues at 10% per annum. In connection with
these borrowings, the Company issued warrants to purchase 302,500 shares of
unregistered common stock at $0.10 per share. Based on the relative fair values
of the securities issued, these
15
warrants were assigned a value of $921,452, which amount has been recorded as a
note discount to be amortized into interest expense over the one-year lives of
the notes. During the six months ended June 30, 2000, the Company recorded
amortization of note discount of $422,332 related to this debt.
In June 2000, the Company received gross proceeds of $3,500,000 through
the private placement of 437,500 shares of its common stock. The shares of
common stock were sold at $8.00 per share, representing a 12% discount to the
closing bid price of the common stock on the day preceding the transaction.
During the six months ended June 30, 2000, certain of the Company's
employees and consultants exercised stock options that had been issued pursuant
to the Company's various stock incentive plans. During this period, the Company
issued 535,334 shares of its common stock and received gross proceeds of
$1,298,752 related to these exercises.
During the six months ended June 30, 2000, the Company issued equity
securities to certain employees, consultants and companies for services provided
to the Company. These securities included the issuance of shares of common
stock, warrants and options. These transactions were individually valued based
upon the fair value of the securities issued or the services provided, whichever
was more reliably measured. During the three and six months ended June 30, 2000,
the Company recorded general and administrative expenses associated with these
services of $361,842 and $891,014, respectively. At June 30, 2000, an additional
$452,256 was recorded as prepaid expenses to be amortized over the remaining
lives of the underlying service agreements.
During the six months ended June 30, 2000, the Company issued 1,947,700
shares of its common stock to investors who exercised warrants granted in
connection with previous financings for proceeds of $7,582,475. Subsequent to
these exercises, the Company had warrants outstanding at June 30, 2000 to
purchase 290,000 shares of its common stock at prices that range from $2.00 to
$18.00.
For the six months ended June 30, 2000, the Company's operating activities
used $11,969,124 of cash. This use was primarily the result of a $10,637,417 net
loss and a net decrease in accounts payable of $2,208,537 and an increase in
accounts receivable of $1,695,232, offset by depreciation and amortization of
$953,530, loan amortization of $422,332 and non-cash charges related to equity
securities issued for services of $891,014. Cash used in investing activities
for the six months ended June 30, 2000 was $518,692, which included $53,326 in
capitalized tooling costs, $168,631 related to the acquisition of patents, and
$291,336 for the acquisition of property and equipment. Proceeds from the
Company's financing activities for six months ended June 30, 2000 were
$17,134,259, which primarily consisted of $9,573,630 from the exercise of
warrants and options, $5,955,867 from the issuance of the Company's common
stock, both net of related fees, and net borrowings on notes and loans of
$1,604,762. As a result of the above, cash and cash equivalents on hand as of
June 30, 2000 was $6,723,260, an increase of $4,597,260 from the $2,126,000 of
cash on hand as of December 31, 1999.
For the six months ended June 30, 1999, the Company's operating activities
used $10,158,666 of cash. This was primarily the result of a $9,175,752 net loss
and a net increase in inventories of $4,289,124. These were offset by a net
increase in accounts payable of $3,698,195 and depreciation and amortization of
$604,794. Cash used for investing activities for the six months ended June 30,
1999 was $1,391,249 and was primarily related to acquisition of property and
equipment, patents, and tooling costs. Cash provided by financing activities for
the six months ended June 30, 1999 was $12,902,162, which consisted of net
proceeds of $10,875,701 and $3,356,802 from the issuance of the Company's
preferred and common stock, respectively, $285,704 from new loans and repayment
of notes and loans of $1,616,045.
At June 30, 2000, the Company had commitments to purchase additional
inventory and engineering services from its suppliers and partners. These
commitments result from formal and informal agreements to purchase additional
inventory and to enhance the MA IV product line, to design and manufacture
daylight readable flat panel displays and to design and manufacture the
Company's next generation products. While the timing and amount of these
shipments and services may be adjusted, the total amount scheduled to be paid by
December 31, 2000 is approximately $5,000,000.
The Company anticipates that its working capital requirements and operating
expenses will increase as the Company expands production and sales of its Mobile
Assistant series and software products, develops and sells new models in the
Mobile Assistant series, further expands its 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 Mobile Assistant
series and other products, 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
offerings, mergers, strategic investments, strategic partnerships and 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, operating cash flow, and outside
funding will provide sufficient liquidity to meet the Company's ongoing cash
requirements. However, there can be no assurance that the Company can or will
obtain sufficient funds from operations or from closing additional financings on
terms acceptable to the Company. If the Company is unable to obtain sufficient
additional financing, it will be required to reduce discretionary spending in
order to maintain its
16
operations at a reduced level. Management believes that it will be able to
reduce discretionary spending if required but that such reduction would
negatively impact progress on implementing the Company's business plan.
17
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A) EXHIBITS
27.1 Financial Data Schedule
B) REPORTS ON FORM 8-K
On April 7, 2000, the Company acquired Selfware, Inc for 429,327 shares of
Xybernaut Corporation common stock valued at approximately $8,100,000. On April
18, 2000, the Company filed a Form 8-K (file No. 000-21013) with the Securities
and Exchange Commission related to this acquisition.
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