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
SEPTEMBER 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 (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION)
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 November 9, 2000
Common stock - $0.01 par value 39,379,092
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......................... 11
Item 3 - Quantitative and Qualitative Disclosures About Market Risk............ 20
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K...................................... 20
3
XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS September 30, 2000 December 31, 1999
------------------ ----------------
Current assets:
Cash and cash equivalents $ 5,469,473 $ 2,126,000
Accounts receivable, net 3,766,147 1,704,310
Inventory, net 4,280,408 6,081,450
Prepaid and other current assets 873,383 635,288
------------ -------------
Total current assets 14,389,411 10,547,048
------------ -------------
Property and equipment, net 769,173 801,310
------------ -------------
Other assets:
Patent costs, net 775,582 703,174
Tooling costs, net 358,978 286,456
Other 424,306 542,691
------------ -------------
Total other assets 1,558,866 1,532,321
------------ -------------
Total assets $16,717,450 $ 12,880,679
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,531,277 $ 4,929,010
Accrued expenses and other 1,996,238 2,483,946
Notes and loans payable, net 3,689,577 1,419,958
------------ -------------
Total liabilities 8,217,092 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 September 30, 2000 and December 31,
1999, respectively; (liquidation preference $0 and $4,600,000 at
September 30, 2000 and December 31, 1999, respectively) - 3,996,588
Common stock, $0.01 par value, 80,000,000 shares authorized;
39,332,402 and 30,373,734 shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively 393,324 303,737
Additional paid-in capital 72,857,280 47,746,424
Foreign currency translation (113,340) 58,541
Accumulated deficit (64,636,906) (48,057,525)
------------ -------------
Total stockholders' equity 8,500,358 4,047,765
------------ -------------
Total liabilities and stockholders' equity $16,717,450 $ 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ----------- -------------
Revenue:
Product sales $ 1,049,509 $ 1,004,030 $ 4,665,807 $ 3,081,564
Consulting and other 967,297 897,815 2,387,906 3,129,777
------------ ------------ ----------- -------------
Total revenue 2,016,806 1,901,845 7,053,713 6,211,341
Cost of sales 1,446,384 1,414,578 5,028,837 4,522,564
Inventory reserve 1,000,000 - 1,000,000 -
------------ ------------ ----------- -------------
Gross profit(loss) (429,578) 487,267 1,024,876 1,688,777
Operating expenses:
Sales and marketing 2,416,910 2,125,206 8,376,105 7,447,231
General and administrative 1,600,535 1,904,894 4,436,030 5,179,329
Research and development 1,246,278 343,012 3,455,861 2,184,213
Merger costs - - 621,048 -
------------ ------------ ----------- -------------
Total operating expenses 5,263,723 4,373,112 16,889,044 14,810,773
------------ ------------ ----------- -------------
Operating loss (5,693,301) (3,885,845) (15,864,168) (13,121,996)
Interest and other, net (247,519) 4,749 (676,868) 70,450
------------ ------------ ----------- -------------
Loss before provision for income taxes (5,940,820) (3,881,096) (16,541,036) (13,051,546)
Provision for income taxes 1,143 49,832 38,344 55,136
------------ ------------ ----------- -------------
Net loss (5,941,963) (3,930,928) (16,579,380) (13,106,682)
Provision for preferred stock dividends - 125,949 10,438 229,456
Provision for accretion on preferred stock
beneficial conversion feature - 574,861 - 1,379,804
------------ ------------ ----------- -------------
Net loss applicable to holders of common stock $(5,941,963) $(4,631,738) $(16,589,818) $(14,715,942)
============ ============ ============= =============
Net loss per common share applicable to
holders of common stock (basic and diluted) $ (0.15) $ (0.20) $ (0.44) $ (0.64)
============ ============ =========== =============
Weighted average number of common shares
outstanding (basic and diluted) 38,579,676 23,712,735 37,304,405 22,974,580
============ ============ =========== =============
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
XYBERNAUT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
Nine Months Ended September 30,
------------------------------
2000 1999
------------ ------------
Cash flows from operating activities:
Net loss $(16,579,380) $(13,106,682)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,240,710 1,070,692
Inventory reserve 1,000,000 -
Amortization of note discount 652,633 -
Provision for bad debts 72,794 50,000
Non-cash charges for equity securities issued for services 1,070,502 11,772
Changes in assets and liabilities:
Accounts receivable (2,203,078) 22,713
Inventory 451,111 (4,310,575)
Prepaid and other current assets 64,991 (552,581)
Other assets (87,661) (68,834)
Accounts payable (2,354,896) 2,850,080
Accrued expenses and other (367,406) 1,531,786
------------ ------------
Net cash used in operating activities (17,039,680) (12,501,629)
------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment, net (170,808) (919,540)
Acquisition of patents (262,319) (350,239)
Capitalization of tooling costs and other (177,674) (924,761)
------------ ------------
Net cash used in investing activities (610,801) (2,194,540)
------------ ------------
Cash flows from financing activities:
Preferred stock offerings, net - 11,845,509
Common stock offerings, net 8,945,837 3,456,802
Notes and loans payable, net 2,334,178 (1,226,225)
Exercise of warrants and options 9,775,866 -
------------ ------------
Net cash provided by financing activities 21,055,881 14,076,086
Effect of exchange rate changes on cash and cash equivalents (61,927) 17,453
------------ ------------
Net increase in cash and cash equivalents 3,343,473 (602,630)
Cash and cash equivalents, beginning of period 2,126,000 1,052,649
------------ ------------
Cash and cash equivalents, end of period $ 5,469,473 $ 450,019
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 218,202 $ 46,283
============ ============
Cash paid for taxes $ 44,946 $ 23,264
============ ============
Supplemental disclosure of non-cash financing activities:
Common stock issued for preferred stock dividend requirements $ 153,904 $ 65,934
============ ============
Provision for preferred stock dividend requirements $ 10,438 $ 229,456
============ ============
Equity securities issued as payment of accounts payable $ 109,740 $ -
============ ============
Charges to conform accounting policies during merger $ 168,365 $ -
============ ============
Equity securities issued for future services $ 272,343 $ 11,772
============ ============
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 and 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 and 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 September 30, 2000 and December 31, 1999,
the results of their operations for the three and nine months ended September
30, 2000 and 1999 and of their cash flows for the nine months ended September
30, 2000 and 1999. Results of operations for the three and nine months ended
September 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
(Boeblingen, Germany), Xybernaut K.K. (Yokohama, 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
During 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which separates
comprehensive income into two components, net income and other comprehensive
income. Other comprehensive income refers to revenues, expenses, gains and
losses that under generally accepted accounting principles are recorded as an
element of stockholders' equity and are excluded from net income. The
Company's other
7
comprehensive income is comprised solely of foreign currency translation gains
and losses. For the three months ended September 30, 2000 and 1999,
comprehensive loss was $6,057,362, consisting of a net loss of $5,941,963 and
foreign currency translation loss of $115,399, and $3,761,432, consisting of a
net loss of $3,930,928 and foreign currency translation gain of $169,496,
respectively. For the nine months ended September 30, 2000 and 1999,
comprehensive loss was $16,692,720, consisting of a net loss of $16,579,380
and foreign currency translation loss of $113,340, and $13,002,789, consisting
of a net loss of $13,106,682 and foreign currency translation gain of $103,893,
respectively.
In June 1997, the Financial Accounting Standards Board (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 the fiscal year ended 1999.
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 adopted FIN 44 during the quarter ended September
30, 2000. The adoption of the Interpretation did not have a significant effect
on the Company's results of operations or its financial position.
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 June 1998, the FASB issued 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.
4. BUSINESS COMBINATION
On April 7, 2000, the Company acquired Xybernaut Solutions, a provider of
services and software for project and asset management (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
8
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 served as a
vice president of the Company between April and September 2000.
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 Nine Months
Ended March 31, 2000 Ended September 30, 1999 Ended September 30, 1999
-------------------- ------------------------ ------------------------
Revenue:
Xybernaut $ 1,498,192 $ 807,735 $ 2,097,666
Xybernaut Solutions 606,280 1,094,110 4,113,675
--------------- --------------- ---------------
$ 2,104,472 $ 1,901,845 $ 6,211,341
=============== =============== ===============
Net Income(Loss):
Xybernaut $ (4,534,762) $ (3,884,252) $ (13,244,170)
Xybernaut Solutions (240,643) (46,676) 137,488
--------------- --------------- ---------------
$ (4,775,405) $ (3,930,928) $ (13,106,682)
=============== =============== ===============
5. INVENTORY
Inventory consists primarily of component hardware parts held for resale
and allocated tooling costs and is comprised of work in process and 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. The Company
has announced a new model of its current product line scheduled for
introduction in the fourth quarter of 2000 in addition to a new product line
that is scheduled for introduction in the second quarter of 2001. While the
Company's management believes that it is likely to sell the existing product
line above historical cost, the Company recorded a $1,000,000 charge to
establish a reserve to cover potential losses in selling the current product
line held in inventory, given the uncertainties created by the introduction of
these new products. At September 30, 2000 and December 31, 1999, the allowance
to reduce inventory balances to net realizable value was $1,120,000 and
$120,000, respectively.
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 and Series E Preferred Stock had been converted
into shares of common stock as of 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
9
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 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.
On December 2, 1999, the Company entered into a financing facility with
IBM Global Finance (the "1999 IBM Facility"). Under the terms of the 1999 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.
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 nine months ended September 30, 2000, the Company
recorded amortization of note discount of $230,301 and $652,633, 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.
10
In July 2000, the Company entered into a new six-month $1,400,000 term
loan with IBM Global Finance (the "2000 IBM Facility"), the terms of which
were similar to those in the 1999 IBM Facility. The borrowing is secured by
certain of 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.
On September 29, 2000, the Company received gross proceeds of $3,000,000
through the private placement of 717,703 shares of its common stock. The
shares of common stock were sold at approximately $4.18 per share,
representing a 24% discount to the lowest bid price of the common stock on the
day preceding the transaction. In connection with this private placement, the
Company also issued warrants to purchase 119,880 shares of its common stock at
an exercise price of $6.25 per shares.
As of September 30, 2000, the Company had entered into an agreement
under which it agreed to purchase a facility near its Yokohama, Japan office for
approximately $540,000 by November 2001. In November 2000, an officer and
director of the Company executed an agreement to personally assume the Company's
agreement to purchase this facility. As a result, the Company's management
believes that the Company has no liabilities related to this facility.
During the nine months ended September 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 nine
months ended September 30, 2000, the Company recorded expenses associated with
these services of $194,202 and $1,070,502, respectively. At September 30,
2000, an additional $272,343 was recorded as prepaid expenses to be amortized
over the remaining lives of the underlying service agreements.
During the nine months ended September 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
638,834 shares of its common stock and received gross proceeds of $1,500,891
related to these exercises during this period.
During the nine months ended September 30, 2000, the Company issued
2,077,700 shares of its common stock to investors who exercised warrants
granted in connection with previous financings for proceeds of $8,274,975.
Subsequent to these exercises, the Company had warrants outstanding at
September 30, 2000 to purchase 409,880 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.
11
Operations in various geographical areas are summarized as follows:
As of and For the As of and For the
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------- -------------------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
North America:
Total revenue $ 1,486,509 $ 1,623,530 $ 4,986,633 $ 5,379,806
Net loss (5,456,383) (3,601,884) (14,921,630) (11,091,428)
Identifiable assets 12,027,259 9,077,152 12,027,259 9,077,152
Europe:
Total Revenue $ 441,292 $ 153,253 $ 1,300,796 $ 380,796
Net loss (206,625) (362,586) (928,451) (900,161)
Identifiable assets 1,284,341 417,873 1,284,341 417,873
Asia:
Total revenue $ 89,005 $ 125,062 $ 766,284 $ 450,739
Net loss (278,955) 33,542 (729,299) (1,115,093)
Identifiable assets 3,405,850 3,369,717 3,405,850 3,369,717
For the three months ended September 30, 2000, two customers individually
comprised 10.5% and 10.1%, respectively, of total revenue. For the nine months
ended September 30, 2000, one customer comprised 15.1% of total revenue and
28.2% of accounts receivable as of September 30, 2000. For the three and nine
months ended September 30, 1999, one customer comprised 15.7% and 13.5%,
respectively, of total revenue.
One of the Company's officers is a member of the board of directors of a
company that purchases software products and consulting services from the
Company. In addition, one of the Company's former officers is the president
and a director of this customer. The Company recorded revenues on sales to
this customer of $51,931 and $211,092 during the three and nine months ended
September 30, 2000, respectively. 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 and $373,365 of expenses related to the marketing
services performed by this customer during the three and nine months ended
September 30, 2000, respectively. These services were paid through the
issuance of the Company's equity securities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 traded on the NASDAQ
National Market under the ticker symbol "XYBR."
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 an Intel Pentium
processor and was introduced during the third quarter of 1997. In the fourth
quarter of 1998, the Company introduced the fourth system in this product
line, the Mobile Assistant IV ("MA IV(R)"), which uses an Intel Pentium
processor.
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
12
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 series 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 nine months ended September 30, 2000
and 1999, the Company received net proceeds of $18,721,703 and $15,302,311,
respectively, from private placements of its equity securities and exercise of
warrants and options, along with proceeds of $4,425,000 and $140,000,
respectively, from borrowings.
Historically, the Company has derived its revenues from sales of its
Mobile Assistant series, software products and consulting services. 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 reserves, 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 September 30, 2000, the Company had an
accumulated deficit of $64,636,906. 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 additional financing, it will be required to reduce
discretionary spending and maintain its operations at a reduced level, which
would negatively impact progress on implementing the Company's business plan.
13
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 (Boeblingen, Germany), Xybernaut K.K. (Yokohama, 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 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 September 30, 2000, the
Company had approximately $57,000,000 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 September 30, Nine Months Ended September 30,
------------------------------ -------------------------------
2000 1999 2000 1999
------ ------ ------ ------
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of sales 71.7% 74.4% 71.3% 72.8%
Inventory reserve 49.6% --% 14.2% --%
------ ------ ------ ------
Gross margin (21.3)% 25.6% 14.5% 27.2%
Operating expenses:
Sales & marketing 119.8% 111.7% 118.7% 119.9%
General & administrative 79.4% 100.2% 62.9% 83.4%
Research & development 61.8% 18.0% 49.0% 35.2%
Merger costs --% -- 8.8% --
------ ------ ------- ------
Total operating expenses 261.0% 229.9% 239.4% 238.5%
Interest and other, net (12.3%) 0.2% (9.6%) 1.1%
------ ------ ------- ------
Loss before provision for income taxes (294.6%) (204.1%) (234.5%) (210.2%)
Provision for income taxes 0.1% 2.6% 0.5% 0.9%
------ ------ ------- ------
Net loss (294.7%) (206.7%) (235.0%) (211.1%)
====== ====== ======= ======
Provisions for preferred stock --% 36.8% 0.1% 25.9%
====== ====== ======= ======
Net loss applicable to holders
of common stock (294.7%) (243.5%) (235.1%) (237.0%)
====== ====== ======= ======
14
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Revenue for the quarter ended September 30, 2000 was $2,016,806,
an increase of $114,961, or 6.0%, compared to $1,901,845 for the corresponding
period in 1999. The increase in revenue was due to higher product sales of its
MA IV wearable computer product line, offset partially by lower sales of its
software products in the third quarter of 2000 compared to the 1999 period,
during which the Company had significant sales of a Year 2000 compliance
software package.
COST OF SALES. The Company's cost of sales, excluding inventory reserve
charges, for the quarter ended September 30, 2000 was $1,446,384, an increase
of $31,806, or 2.2%, compared to $1,414,578 in the corresponding period in
1999. The increase in cost of goods sold corresponded with the increase in
revenues for the same period, resulting in gross margins of 28.3% and 25.6%
for the 2000 and 1999 periods, respectively. The Company has announced a new
model of its current product line scheduled for introduction in the fourth
quarter of 2000 in addition to a new product line that is scheduled for
introduction in the second quarter of 2001. While the Company's management
believes that it is likely to sell the existing product line above historical
cost, the Company recorded a $1,000,000 charge to establish a reserve to cover
potential losses in selling the current product line held in inventory, given
the uncertainties created by the introduction of these new products. This
reserve resulted in an overall gross loss of 21.3%. No inventory reserve was
recorded in the corresponding period in 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the
quarter ended September 30, 2000 were $2,416,910, an increase of $291,704, or
13.7%, compared to $2,125,206 for the corresponding period in 1999, which was
commensurate with the increase in revenue. This increase was primarily the
result of continued sales and marketing efforts for the Company's hardware
products and included approximately $160,914 and $0 of non-cash expenses that
were recorded for outside marketing services funded through the issuance of
the Company's equity securities during the comparable 2000 and 1999 periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the quarter ended September 30, 2000 were $1,600,535, a decrease of
$304,359, or 16.0%, compared to $1,904,894, for the corresponding period in
1999. This decrease was primarily the result of approximately $900,000 of
legal expenses and judgments accrued during the 1999 period for which no
significant comparable expenses were recorded during the 2000 period.
Additionally, management significantly reduced discretionary expenses during
the 1999 period because of the liquidity constraints experienced by the
Company in the last half of fiscal 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the quarter ended September 30, 2000 were $1,246,278, an increase of $903,266,
or 263.3%, compared to $343,012 for the corresponding period in 1999. This is
primarily the result of increased expenditures in the third quarter of 2000
related to the introduction of an enhanced version of the MA IV computer, a
line of daylight readable flat panel displays and the Company's next
generation product line. During the comparable period of 1999, significant
product development costs were not incurred because the MA IV product line had
recently been introduced.
INTEREST AND OTHER, NET. Other expense for the quarter ended September 30,
2000 was $247,519 a decrease of $252,268, or 5,312.0%, compared to other income
of $4,749 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 $55,800 of interest and other income.
PROVISION FOR TAXES. The Company accrued $1,143 for a tax provision
at September 30, 2000 related to the operations of its foreign subsidiaries.
The Company's U.S. operations had a net loss for
15
the three months ended September 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 September 30,
2000, the amount of dividends accrued was $0, a decrease of $125,949, or 100%,
compared for the same period of the prior year. The accretion of the
beneficial conversion feature of the Company's preferred stock recognized in
the quarter ended September 30, 2000 was $0, a decrease of $574,861, or 100%,
compared to the same period a year earlier. These decreases were the result of
the elimination of outstanding preferred stock during the 2000 period as
compared to the 1999 period.
NET LOSS ATTRIBUTABLE TO HOLDERS OF COMMON STOCK. As a result of the
factors described above, the net loss attributable to holders of common stock
for the quarter ended September 30, 2000 was $5,941,963, an increase of
$1,310,225, or 28.3%, compared to $4,631,738 for the corresponding period in
1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Revenue for the nine months ended September 30, 2000 was
$7,053,713, an increase of $842,372, or 13.6%, compared to $6,211,341 for the
corresponding period in 1999. The increase in revenue was due primarily to
higher product sales of its MA IV wearable computer product line during 2000
compared to 1999. Partially offsetting the increased hardware 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. Cost of sales, excluding inventory reserve charges, for
the nine months ended September 30, 2000 was $5,028,837, an increase of
$506,273, or 11.2%, compared to $4,522,564 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 gross margins of 28.7% and 27.2%
for the 2000 and 1999 periods, respectively. The Company has announced a new
model of its current product line scheduled for introduction in the fourth
quarter of 2000 in addition to a new product line that is scheduled for
introduction in the second quarter of 2001. While the Company's management
believes that it is likely to sell the existing product line above historical
cost, the Company recorded a $1,000,000 charge to establish a reserve to cover
potential losses in selling the current product line held in inventory, given
the uncertainties created by the introduction of these new products. This
reserve resulted in an overall gross margin of 14.5% during the nine months
ended September 30, 2000. No inventory reserve charge was recorded in the
corresponding period in 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the nine
months ended September 30, 2000 were $8,376,105, an increase of $928,874, or
12.5%, compared to $7,447,231 for the corresponding period in 1999, which was
commensurate with the increase in revenue. This increase was primarily the
result of continued efforts to support sales of the Company's hardware product
and included approximately $921,140 and $0 of non-cash expenses that were
recorded for outside marketing services funded through the issuance of the
Company's equity securities during the comparable 2000 and 1999 periods.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the nine months ended September 30, 2000 were $4,436,030, a decrease of
$743,299, or 14.4%, compared to $5,179,329, for the corresponding period in
1999. This decrease was primarily the result of approximately $1,100,000 of
separation and legal expenses accrued during the 1999 period for which no
significant comparable expenses were recorded during the 2000 period.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the nine months ended September 30, 2000 were $3,455,861, an increase of
$1,271,648, or 58.2%, compared
16
to $2,184,213 for the corresponding period in 1999. This is primarily the
result of increased expenditures in the nine months ended September of 2000
related to the introduction of an enhanced version of the MA IV computer, a
line of daylight readable flat panel displays and the Company's next
generation product line. During the first nine 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 nine months ended
September 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, NET. Other expenses for the nine months ended
September 30, 2000 was $676,868, an increase of $747,318, or 1,060.8%, compared
to other income of $70,450 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 $228,379 of interest and other income.
PROVISION FOR TAXES. The Company accrued $38,344 for a tax provision
at September 30, 2000 related to operations of its foreign subsidiaries.
The Company's U.S. operations had a net loss for the nine months ended
September 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 nine months ended September
30, 2000, the amount of dividends accrued was $10,438, a decrease of $219,018,
or 95.5%, compared to $229,456 for the same period of the prior year. The
accretion of the beneficial conversion feature of the Company's preferred
stock recognized in the nine months ended September 30, 2000 was $0, a
decrease of $1,379,804, or 100%, compared to the same period a year earlier.
These decreases were the result of the reduction of outstanding preferred
stock during the 2000 period as compared to the 1999 period.
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 nine months ended September 30, 2000 was $16,589,818, an increase of
$1,873,876, or 12.7%, compared to $14,715,942 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.
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. 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 this debt.
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.
17
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 "1999 IBM Facility"). Under the terms of the 1999 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.
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.
18
During the three and nine months ended September 30, 2000, the Company
recorded amortization of note discount of $230,301 and $652,633, 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.
In July 2000, the Company entered into a new six-month $1,400,000 term
loan with IBM Global Finance (the "2000 IBM Facility"), the terms of which
were similar to those in the 1999 IBM Facility. The borrowing is secured by
certain of 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.
On September 29, 2000, the Company received gross proceeds of $3,000,000
through the private placement of 717,703 shares of its common stock. The
shares of common stock were sold at approximately $4.18 per share,
representing a 24% discount to the lowest bid price of the common stock on the
day preceding the transaction. In connection with this private placement, the
Company also issued warrants to purchase 119,880 shares of its common stock at
an exercise price of $6.25 per shares.
During the nine months ended September 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 nine
months ended September 30, 2000, the Company recorded expenses associated with
these services of $179,488 and $1,070,502, respectively. At September 30,
2000, an additional $272,343 was recorded as prepaid expenses to be amortized
over the remaining lives of the underlying service agreements.
During the nine months ended September 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
638,834 shares of its common stock and received gross proceeds of $1,500,990
related to these exercises during this period.
During the nine months ended September 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
September 30, 2000 to purchase 409,880 shares of its common stock at prices
that range from $2.00 to $18.00.
For the nine months ended September 30, 2000, the Company's operating
activities used $17,039,680 of cash. This use was primarily the result of a
$16,579,380 net loss, a net decrease in accounts payable of $2,354,896 and an
increase in accounts receivable of $2,203,078, offset by depreciation and
amortization of $1,240,710, loan amortization of $652,633, an inventory
reserve of $1,000,000 and non-cash charges related to equity securities issued
for services of $1,070,502. Cash used in investing activities for the nine
months ended September 30, 2000 was $610,801, which included $177,674 in
capitalized tooling costs, $262,319 related to the acquisition of patents, and
$170,808 for the acquisition of property and equipment. Proceeds from the
Company's financing activities for the nine months ended September 30, 2000
were $21,055,881, which primarily consisted of $9,775,866 from the exercise of
warrants and options, $8,945,837 from the issuance of the Company's common
stock, both net of related fees, and net borrowings on notes and loans of
$2,334,178. As a result of the above, cash and cash equivalents on hand as of
September 30, 2000 was $5,469,473, an increase of $3,343,473 from the
$2,126,000 of cash on hand as of December 31, 1999.
For the nine months ended September 30, 1999, the Company's operating
activities used $12,501,629 of cash. This was primarily the result of a
$13,106,682 net loss and a net increase in
19
inventories of $4,310,575. These were offset by a net increase in accounts
payable and accrued expenses of $4,381,866 and depreciation and amortization
of $1,070,692. Cash used for investing activities for the nine months ended
September 30, 1999 was $2,194,540 and was primarily related to the acquisition
of property and equipment, patents, and tooling costs. Cash provided by
financing activities for the nine months ended September 30, 1999 was
$14,076,086, which consisted of net proceeds of $11,845,509 and $3,456,802
from the issuance of the Company's preferred and common stock, respectively,
$422,604 from new loans and repayment of notes and loans of $1,648,829.
At September 30, 2000, the Company had commitments to purchase additional
inventory and engineering services from its suppliers and partners. These
commitments result from agreements to purchase additional inventory, enhance
the MA IV product line, design and manufacture daylight readable flat panel
displays and design and manufacture the Company's next generation products.
While the timing and amount of certain of these shipments and services may be
adjusted, the total amount scheduled to be paid by June 30, 2001 is
approximately $6,500,000.
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, strategic investments, strategic
partnerships and various forms of debt financings. If additional funds are
raised through the issuance of equity securities, the percentage of ownership
of current stockholders of the Company will be reduced. If additional funds
are raised through borrowings, the Company will be subject to additional
interest charges and principal repayments and may be required to comply with
financial covenants or other restrictions. 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 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.
20
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
No reports on Form 8-K were filed during the quarterly period ended
September 30, 2000.
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
Chief Executive
Officer