The Credibility-Destroying Earnings Q&A Reply

2 minute read

By Small-Cap Institute, Inc.

Investor: “I saw the cash balance at quarter end.  Do you need to raise more capital?”

CEO: “We have no plans to raise capital at this time.”

[12 days later, the company issues a press release detailing a $20 million PIPE.]

***

In the micro- and small-cap worlds, this fact pattern is as certain as day following night. And every time, companies and management teams lose precious credibility. 

These CEOs are underscoring with investors that they are coy at best, and disingenuous at worst.

When you ask CEOs why they did this, you typically hear several answers:

  • “We had a good quarter, and the stock finally has some momentum. I didn’t want to kill the momentum by focusing on the impending dilution.”
  • “We discussed it with our lawyers. Technically, the answer was accurate.”
  • “As soon as you mention anything about financing, the short-sellers are all over your stock.”

The problem with these answers – and others like them – is that even inexperienced investors can do basic math.  And all the inputs to the seminal equation are hiding in broad daylight; you run a public company.

Cash on Hand < Burn Rate = You Imminently Need Money

So, how do you handle this question next time without impugning your integrity?  Consider – in the words of a great M&A lawyer – “a strategic retreat to the truth.”

***

Investor: “I saw the cash balance at quarter end.  Do you need to raise more capital?”

CEO: “Thanks for the question, [Name].  Look, you need only look at our balance sheet and income statement to know that we don’t yet generate sufficient cash internally to cover our expenses and growth initiatives.  Until that changes, we will need to raise capital from time to time.  When we raise capital, you have my word that we’ll try and do so as opportunistically as possible to try and minimize dilution.  After all, I’m a shareholder, and I don’t’ relish the dilution either.”