CYBER NUTS?...Anecdotes of the mania are plentiful these days. We have refrained from telling our fair share of stories, but this one is a special example of "blind faith". An acquaintance of ours has owned a company called Xybernaut for a few weeks. When he originally told us of his investment, he only knew the stock symbol and hadn't a clue as to what the company did for a living. Of course it was a tip. XYBR is a BB stock that has risen from the low single digits to the low $20's over the last six months, after a brief rest stop in the high $20's. Last Friday, a story crossed Bloomberg about 1 hour prior to the close stating that the company's new auditors, Grant Thornton, had issued a "warning of substantial doubt about the wearable computer maker's ability to continue as a going concern because of continuing losses and a need for more capital". The company's prior auditors, PriceWaterhouseCoopers, were fired last Sept 13. PWC had also rendered a "going concern"
warning. Management was quick to rebut the Bloomberg article stating it was comfortable with the company's financial position and that auditor notes regarding going concern doubt had been in its financial statements each quarter since originally going public. How reassuring.
What may be more interesting is that in the Bloomberg article, notes from Xybernaut's annual report revealed that the company had been selling unregistered stock in January and February of this year well below the market price of the trading stock. Unregistered stock was sold in January by the company for $3.80 per share. In the open market, the low trade for the month was $5 9/16 and the weighted average price for the month was $11.20. The company borrowed $3 million in January at 10% and issued the lender warrants to purchase shares at 10 cents as an inducement. Nothing here is illegal and, in fact, none of these actions are uncommon in the new world. The stock was hit for a loss of almost $5 1/2 last Friday, but quickly recouped the entire drop as of today's close. (After all, they'll be on CNBC's "The Edge" program tonight.) We really do not know Xybernaut and do not pass judgment on the company's investment merits. This is just an anecdote of the faith investors are putting in as of yet unproven companies without profits. As you would imagine XYBR took top honors in the last few days on chat boards such as Raging Bull and the Yahoo posting boards. Maybe we are simply comparing apples to oranges, but can you imagine if P&G's auditors issued a going concern warning and you found out that they were selling unregistered stock well
below market price? Then again, maybe P&G would have just washed out their auditor's mouths with soap.
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