‘Fully Diluted’: What’s the right @#$% number?
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I came across a Twitter dust up last week between two folks who disagreed about the total outstanding number of shares of Curaleaf ($CURA) that exist. They went on to spend much effort trying to ‘prove’ the number they had was right.
It began civil enough, but ended predictably in vitriol and name calling….. a non-optional feature of online discourse in the modern age.
By default, I eschew getting numbers from anywhere except financial statements. These are legally defined, actionable documents: consumers of them have been granted relative protection and given methods of recourse under law in the case of material misstatement. Sourcing numbers from financials (and occasionally press releases if incremental or unique information is presented in them) is the bar (heh) for quality we set at any rate.
So, as to the argument, sure as heck all one has to do is to look up what $CURA says the share count is, and any argument is over, right? From their last financials:
This Note says there are 654,232,581 common shares (625,228,556 + 28,944,035) fully diluted in the float. Solved!
Under Note 12 (Shareholders Equity), there’s this:
Because looking at capital structure is what I do, I had gone back under the corporate charter and discovered that by design, the total amount of options that can be issued and active by the company are capped at 10% of the total amount of shares outstanding. $CURA’s been aggressive in ensuring this ‘maximum’ is always reserved, as mentioned in our last Structure.
Thus, Note 12 tells us that there is 732,836,080 shares in the float. Add in the 16.5MM shares from their overnight raise last week, and one now has a total amount of 749,336,080 subordinates in their fully diluted float as of today.
If we add that overnight raise to Note 15 and compare with the value imputed from Note 12 – there’s a break of some 80MM shares outstanding between the values reported [((654,232,581 + 16,500,000)) – (749,336,080) = 78,603,499]. Why a break?
I don’t know. Perhaps a simple explanation exists, $CURA would be the one to ask. Whether they answer is another thing.
What about the RSU’s? That’s another source of subordinates as well. I didn’t go there because I’m not the type who gets too wound up: I see this sort of thing EVERY SINGLE DAY across a host of companies and all manner of breaks in shareholder equity and operations. Getting wrapped up in this in argument is folly to myself in the absence of materiality. (Seriously, if one does care: ask the company. Know though, even then you may not get the right answer). Validating whether the RSU’s have been included in this context – incrementally – is immaterial. Importantly, while my Cost of Capital (CoC) calculations includes share count, it does not hinge upon them. A good model should always acknowledge any inherent instability/validity of input variables.
That may not placate the person who wants a simple answer to a simple question. And a simple answer it should be.
Perhaps market cap and forward earnings per share calculations is your jam. If so, that means the break represents a difference in reported market cap of some $1.3B ($17 x 78MM).
I can say that of all the froth and tittering about discounted forward cash flow (DCF) that’s driving sooooo many of the sell side valuations currently will be impacted by a 10% variance in share count, which, will be magnified by any timing differences of when forward cashflows are assumed to initiate under those DCF models.
In other words: take predictions of future value with a very large grain of salt, and keep a big glass of water handy.
Sell side will typically come back to this with a “How many Angels can dance on the top of a pin?” sort of deflection. It’s why I don’t engage in online discussion that requires nuance on Reddit or Twitter anymore. Goal-post moving and topic shifts are a feature of online discourse these days – driven by a serious lack of critical reasoning skills or bad faith or whatever.
The preceding is provided in the interest of investor education.
I occasionally think about the many ‘fact-free’ discourses out there on the Wild West of the Internet, and often feel for the individual who has to confront it. Particularly if that individual does have an interest in achieving degrees of accuracy. I don’t care about share count in this example because I don’t like $CURA’s capital structure in the first place. And that isn’t driven by whether or not there’s another 78,603,499 shares in Boris’ desk at this moment.
There’s 5 more breaks I’ve found as well, but given growth-driven flux in operations and equity, I won’t be able to validate them for another set of financials (or two. Or three). The specific example provided above – shares outstanding – unto itself, simply raises a question, nothing more. In totality, those 6 breaks are the reason why I don’t like their capital structure. I can’t say much about a number other than ‘I can’t back into it’. My concerns around a lack of disclosure amplifies when an outfit blows me off on a direct question about an issue (on the completely different subject of PTMass) which – in my opinion – creates a prima facie instance of self-dealing.
Just some thoughts for your Sunday morning.
TheCannalyst project emerged from the idea of investor education, and I like to stretch that muscle every once in awhile. I think this also serves as useful illustration of what we do as a research/analytical firm when we get into a set of financials. GoBlue does this on the same level when he looks at the operational side of a business. As does Cyto when he delves into patent research and validation.
Coming up next is a Structure on a company that likely wishes it had some of $CURA’s current travails. The coming week will see our optionality calculations on the MSO space put up for subscribers. Time for another French press and to hunker in.
We thank you sincerely for being here.
The preceding is in the opinion of the author, and is in no way a recommendation to buy or sell any security or derivative. The author holds no position $CURA.
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