How do you create short-term gains for shareholders?
The unprofitable company changed their name to Long Blockchain and saw shares rise as much as 289%.
Source: Google Finance
Long Blockchain will look to invest and partner with companies developing blockchain technology. Management has decided to keep their Iced Tea business. But their core focus will be blockchain.
The easiest, cheapest source of funding
Whether Long Blockchain becomes a blockchain success is beside the point. Management, who likely want to improve shareholder value, has come up with the smartest way to potentially raise cheap money.
There are usually two ways to raise funds. Companies can either take on more debt (borrowing from the bank or issuing company bonds). Or they can issue more shares to the public.
But if shares are grossly overvalued, and earnings are unpredictable, then issuing shares might be the better option. You get more bang for your buck that way.
Obviously there are other factors that go into the decision, but the above are just the basics.
For a company like Long Blockchain, debt would be a horrible way to raise capital. The company is unprofitable. They don’t have a reliable stream of cash flowing into the business. The last thing they need is regular interest payments to hamper earnings further.
Issuing shares on the other hand could be a great way for management to raise cash. As mentioned above, the shares jumped more than 280% and now trade at $6.91 per share.
Assuming the company wanted to raise $100 million, they’d only need to issue about 14.5 million shares. Whereas, days ago when the share price was $2.44, it would have taken more than 40.9 million shares to raise the same $100 million.
Thus the company has saved shareholders possible over dilution simply by announcing they’re a blockchain company.
I suspect it could be a long time before Long Blockchain starts to generate significant profits to justify their share price. At the moment, the company has a market cap of close to $70 million.
It’s not a lot. But compared to the company’s earnings, it’s significant. For the company to trade at a price-to-earnings ratio of say 15-times, they’d need to generate approximately $4.7 million.
It’s not something particularly hard to do. But as it stands, Long Blockchain generates a loss of more than $10 million.
Safe to say it could be a long road ahead for Long Blockchain. But at least they can now raise more money and with dilution.
Junior Analyst, Money Morning
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