Analysis #4 – Dilution:
I think dilution can be looked at two ways. There is a good dilution and a bad dilution. The giveaways that occurred recently were bad dilution. Someone asked how we defend it. I won’t. I don’t know what that is all about, but someday I hope to talk to someone in Toronto or hear from someone else who posts they talked to Toronto, and we get an answer for that. For now, I think that was bad. However, there is also GOOD dilution, and that has happened a lot in the past two years, but I don’t think is being looked at as being good. So here’s my thoughts on it.
The company is still young in the expansion game. They said they were going to expand into the USA, but in reality they had no money to DO the expansion. So they needed investors. That meant dilution. But … that is the type of dilution that is WORTH doing. Let me show you some approximate (and not actual, but conformed to averages) numbers.
We had 3 cafes open in 2018. We also had about 600 million shares outstanding. That’s about “200 million shares outstanding per café and thus per $2 million in revenue”. Yes I know there were other businesses as part of Amfil too, but I’m just talking about the S&L Cafes. I’m also rounding EVERY café to the same numbers, which is NOT true, but which makes it easier to show how the model works. Basically this is a simplistic illustration of one part of the company, not a full overall review of what they are doing. So … as I told them in 2018, if we spend about 40 million shares to open a new café (Tempe?), that means we would have 640 million shares outstanding. But we would have 4 cafes open. That drops us to only “160 million shares per café and revenue stream.” If we then open yet another venue (Tucson?) and can do that one for another 40 million shares spent to get the funds to do it, that is now 680 million shares for 5 cafes, or “136 million shares outstanding per café and per $2 million in revenue.” Makes the total outstanding higher, but the value per share MORE, as it takes less shares to get the same revenue number, meaning each share is worth MORE, in spite of the dilution. See my strategy so far? As we add more cafes, we add more revenues, and with 5 cafes open instead of 3 we make $10 million in revenue versus $6 million for 3 cafes. We are up 67% in revenues. Yet our outstanding is up only from 600 million to 680 million, which is 12.5% higher. Let me stop here and say things are MUCH more complicated than that to open and fund cafes. That is just a generalization of how and why expansion would work. (more on expansion in the next post) Granted, what I am talking about is only PART of the overall picture, and they also diluted for other things, but I’m talking about the dilution for cafes. THIS dilution makes great sense. And in the next year or two, I am hoping they CONTINUE to “dilute” some shares and get some investors to open MORE locations to increase revenues and profits, to overcome the corporate needs and other subs and turn this into a larger and finally profitable company. I’ll say it again. The cafes are profitable. People Are coming back, they DO wish to play games and eat our food, our food is NOT just standard bar food (although that seems pretty popular overall, with most bars offering the same things and we need more cafes to make this company GROW. We need to DILUTE for new cafes to add the revenue and increase the value of the company by more than the dilution drops it. If we added another 400 million shares but added another 10 new cafes, that would be AMAZING for us. Even with the dilution. We’d be doing over $30 million in revenue, instead of the $10 million I truly expect for this current fiscal year (From the cafes. Not adding anything for other areas, or doing a corporate review. Just a café review), and a tripling of the revenue and significantly higher overall profits would be worth diluting. Oh, and also … as we add more and more cafes, we shall turn more profitable. That means a higher price for the stock. That means less shares needed per café and LESS dilution. So my illustration of 400 million more shares for 10 more units would probably be WRONG. I told you this is too simplistic and not actual numbers. Just the illustration. But 10 new cafes would be maybe only 250 million more shares to get open. As the price goes up it would cost less shares and less dilution for the same thing. Make sense? (I’m sure it doesn’t to some who will disagree, but I’m fine with that.) Yes, I had a plan to dilute the company some, but make it worth EVERYONE’S while to do that dilution. Get us to under 80 million shares outstanding per café open and generating money and profits, and the value per share is worth a lot more. That plan could still work. They just need to start expansion again, AFTER they get the existing cafes back up and running smoothly. Deal with that now, and then when things are settled from the pandemic, we start expanding again. But expand in 2022.
The best news is that the current dilution for ongoing needs is getting smaller and smaller, and we are giving out less common stock for ongoing needs, as the cafes are turning black and generating enough to cover the overall costs of everything. That is good. Finally. And as we add more cafes, we shall have less and less need to dilute at all. IN fact, I’ve already been told by the company that my model for expansion shall be TERMINATED after a few more cafes, as the company shall finally be able to do their OWN expansion WITHOUT investors and not NEED to dilute to gain new venues. More on that in my expansion post. The bottom line for dilution is that for corporate needs, the need for dilution is already skrinking rapidly. There are a few things that could be done that would require dilution (Raising of some money to pay for them) but we are not doing those things right now, as we wait for the reopening to generate better positive cash flows. That’s why I also am against spending money for the 2019 audit, even though the company has said they were going to do it. Spend the money on the cafes. Spend the money on things that will generate income back in. And save money off of the newfound positive cashflows from the cafes, for other things. Stop the dilution. GOOD news though is it seems to pretty much have STOPPED already on the common stock side. Aahhh, but you see the outstanding going UP still? That is dilution, but not based on current things. As an example, when I convert some debts for the build out of Tucson, that increases the outstanding. But, that is not really NEW dilution, but an actualization of the old dilution I am talking about. Turning that debt into the 40 million shares per location.
Speaking of expansion though, let’s talk on that ……
