Xybernaut's Dilution Solution

When life gives you lemons, make lemonade. That's turning out to be the motto at wearable tech maker Xybernaut (Nasdaq: XYBR  ) , which released the following, rather curious earnings announcement back in November:

"The net loss for the third quarter of 2003 decreased 41% to $4.7 million from the third quarter of 2002. The net loss per share also decreased to $0.03 per share from $0.10 per share in the prior year."

Now, hold on a sec. What was that again?

The net loss decreased 41%. So, Xybernaut lost 41% less money this third quarter than it did in the third quarter one year ago. Sounds pretty good, aside from the fact that the company's still losing money.

But wait! There's even better news. The net loss per share shrank 70%! That means long-term Xybernaut shareholders who last year saw a loss of 10 cents for each share they owned are probably delighted this year to see their company only lose 3 cents a share. Things are clearly looking up for this developer of portable computers and related software.

Or are they? How does a company lose X dollars as a whole, but a whole lot less than X dollars per share?

By diluting the bejeezus out of the long-term shareholders.

It only takes a glance at the press release to see what happened -- you don't even need to hunt through the filings on FreeEdgar to find it. The first table in the press release has an entry for "Weighted average shares outstanding" for the three months ended Sept. 30, 2002, and for the same period in 2003. In 2002, Xybernaut had 78,011,017 shares outstanding. By Sept. 30, 2003, that number had more than doubled to 158,635,685 -- for a grand total of 103.3% annual share dilution.

And if you double your shares outstanding, you halve your losses per share.

However, share dilution is a double-edged sword. On the one hand, it can make your losses, per share, look better than they are on a company-wide basis. But if things turn around, and the company starts making a profit, then that profit gets divvied up among all the extra shares, too. Shareholders currently tickled at the narrowing losses per share may be less than thrilled when they see what 103.3% dilution does to their per-share profits.

Rich Smithowns no shares of Xybernaut. He might consider shorting Xybernaut but, as Bill Mann wrote, individual investors cannot practically short companies with stocks selling under $5.


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