MSNBC's Chris Byron writes on XYBR here is his 3/22 article.
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Red flags that could be white flags
Xybernaut says the ?going concern? clause in its SEC filings
is a formality, but investors should judge for themselves
OPINION
By Christopher Byron
MSNBC CONTRIBUTOR
March 22 ? A press release was issued this week that should not go unaddressed. The statement from Xybernaut Corp. charged that a reporter for an unnamed news service ?which appears in fact to be the Bloomberg News Service ? behaved, in effect, recklessly and irresponsibly. The news service published a story about the wearable computing company on Friday afternoon, March 17, and raised a number of concerns about the high-tech firm.
THE ARTICLE NOTED that Xybernaut?s latest financial report to shareholders and the Securities and Exchange Commission, filed earlier in the day on March 17, contained a ?going concern? flag from the company?s auditors.
Publication of the news story caused Xybernaut?s stock price to drop abruptly by nearly $6 per share in late Friday trading to roughly $16.50. The Monday press release from Xybernaut and a subsequent press release noting that the company would be featured on CNBC television caused the stock to recover to just over $21 in trading Tuesday.
NOTHING TO BE CONCERNED ABOUT
The Monday press release quoted Xybernaut?s president and CEO, Edward Newman, as saying in rebuttal to the news story, ?The company has never been in a stronger position from a product, sales, or cash position.? He added by way of reassurance to investors, that ?going concern? flags are ?common for growing companies.?
Said Newman, ?The inclusion of this clause is required by accounting practices for companies that are in the process of establishing a cash flow history and is not an opinion that the company is in financial difficulty.? He went on to note that ?going concern? warnings have been included in company filings for the last three years, and questioned why, only now, the inclusion would be deemed newsworthy.
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Newman said the reporter had not contacted his company for comment, or ? in Newman?s opinion ? properly reflected Xybernaut?s strong financial position in the story. In the press release, Newman pointed out that Xybernaut?s revenues have grown fourfold in the last year and that its balance sheet includes $8 million in cash.
INSIDE THE NUMBERS
Now I am sure Xybernaut, of Fairfax, Va., is a fine enterprise, just as I am sure that its ?wearable computers? product line will soon be sweeping the world.
And I am perfectly willing to take Newman at his word that his company is in fine fiddle ? though one should note that much of the $8 million of cash he refers to appears to have been derived from a one-year term loan at a 10 percent interest rate. And we should also perhaps note that Xybernaut?s stock, which has lately been the plaything of Nasdaq momentum traders, was recently changing hands for not much more than $1 per share.
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Finally, we?d certainly be remiss in our effort at balanced and fair reporting not to point out that the company, which at latest look has only 78 full-time employees, has racked up more than $48 million in an accumulated deficit since its inception and has yet to turn a dime of profit on anything.
But be that as it may, the one area in which we would like to go on record as expressing, in our Constitutionally protected opinion, that Xybernaut?s press release is full of baloney, is where Newman argues that ?going concern? auditor flags are ordinary and commonplace auditing expressions for ?growing companies?seeking to establish cash flow histories.?
No company ? big or small, young or old, profitable or drowning in losses ? views a ?going concern? qualification as anything but bad news from an auditor.
Auditors include these qualifications when, in their opinion, the companies whose books they are auditing face serious threats to their ability to carry out their business objectives without fresh sources of capital, which may or may not be available to them.
HOW MUCH OF A ?CONCERN??
Thus, on March 17 ? the very day Xybernaut was filing its latest annual report containing a ?going concern? flag that the company now claims is no big deal ? other companies were filing financials containing ?going concern? statements of their own. Here are some of them:
Blaze Software Inc. filed an IPO registration statement revealing that its auditors in 1997 and 1998 ? KPMG ? had included ?going concern? qualifications in their audits. The company replaced KPMG with PricewaterhouseCoopers LLP, and Blaze has now filed IPO documents that do not contain a ?going concern? flag on the financials.
Velocity.com also filed an IPO registration statement last Friday. This company, also audited by KPMG, contains a ?going concern? flag on its current financials due to ?recurring losses, net capital deficiency?[and] contingent liability? regarding some preferred stock.
Trading Solutions.com likewise filed an IPO registration statement on March 17 ? in this case to raise equity financing as a penny stock. This company too has a ?going concern? flag on its financials from the auditor.
Boytoys.com Inc., a company that apparently runs some kind of nightclub and is engaged in various other business pursuits, filed a 10K annual report last Friday. The 10K contains a ?going concern? flag from the company?s auditors due to ?loss from operations? and ?excess of liabilities over assets.?
In Xybernaut?s case, the company has had a ?going concern? flag on its financials for a simple reason: to execute its business plan the company has needed constant infusions of fresh capital, without which the business would likely have folded years ago.
The company?s stock drop last Friday came at an especially sensitive moment. From a low of $1.31 per share last October, Xybernaut?s stock price had risen to a high of nearly $30 earlier this month ? a run-up giving the company a golden opportunity to recapitalize itself with an offering of stock.
But the price didn?t hold, and from that intra-day high of $29.97 on March 3, the stock weakened back to $22 last Friday. Then came the unwelcome news story, and the stock dropped another $5 or so to close the day at $16.56, or not much more than half its price of almost two weeks earlier. If the slide were to have continued, whatever plans the company might have had for reaping a windfall from its suddenly hot stock price would have vanished.
As for the future, here?s hoping Newman and his company continue to experience yet more of the bounteous good fortune that the current bull market has showered on them already. But investors should be mindful that his company has had a ?going concern? flag on its financials from the very moment it went public back in 1996. Through the whole of that period, up until this last December, the company?s stock price never traded much above $5 per share.
What?s different now? Xybernaut is still a money-losing company with a ?going concern? flag waving from its financials. But its stock price has appreciated more that 300 percent in an exceedingly turbulent market environment ? and making sure that it doesn?t collapse all over again seems to have been the primary motivation behind Monday?s press release. |
