Graphene 3D Lab Inc. (TSX-V: GGG, OTCQB: GPHBF) has announced that there will be a reduction of the company’s outstanding shares by 7.3%. This translates into a change from 44,387,500 to 41,164,955 common shares. The cause of the share reduction is a result of the departure of co-founder Michael Gouzman who served on the company’s advisory board. The rights to the shares were contingent on Mr. Gouzman remaining on the advisory board.
The President and CEO of Graphene 3D, stated “I want to thank Professor Gouzman for his contributions and service to the company and I wish him every success in his future endeavors.”
What are the repercussion of a cancellation or reduction of shares?
More importantly what are the repercussions of the co-founder stepping down from the advisory board?
Effect on cash: It appears as though these shares were reclaimed under specific contract terms, this means Graphene 3D did not have to use company cash to “buy-back” the shares. The liquid assets of the company are unaffected.
Effect on Earnings: A reduction in shares outstanding means each share holds a higher percentage of ownership of corporate earnings. Each shareholders earnings per share should be higher than before the share reduction (assuming no other factors are at play.) With the information given by the press release, and the basic premise of a share reduction, it should be expected that the value of current shares outstanding increases.
Investor Relations: Often a share buy-back (reduction of shares) is perceived to be a positive investor relations activity as it directly benefits each shareholder and demonstrates the company is focused on its ultimate goal of increasing shareholder value. Although in the case of Graphene 3D, the share reduction is a circumstantial result of a contract agreement with Mr. Gouzman. Though the contract term itself shows strong board governance, which gives faith to potential and current investors that the company is managing compensation and share structures responsibly.
Downside: One of the major downsides of this announcement is the departure of a founding advisory board members and co-founder of Graphene 3D Lab. This marks the loss of valuable human capital which includes his networks, insight, and even patents in graphene and related sectors.
I suspect the dip in the share price on the announcement is a reaction to the company losing its co-founder. Mr. Gouzman is well known and highly respected in the industry. Time will tell what Mr. Gouzman’s plans are and what long-term effects his departure will have on the company.