In line with my LinkedIn (LNKD) whistleblower theme (published on LinkedIn), I share a new insight I gathered going over LinkedIn's latest SEC filings.
A large part of such filings is the risk factors section, the equivalent of the "special warnings" in package inserts for medicine regulated by the FDA. Same as in package inserts, the risk factors of a corporation rarely change as they are drafted in the widest possible manner in its initial IPO filing, and are mostly just copied and pasted to new SEC filings. When new risks appear they are embedded to the risk factors section and usually stay there, from that point forward in all future filings.
Amendments to the risk factors can be very telling especially if found only there, although most go unnoticed as no one really reads that section. And even if someone did he wouldn't spot an additional unmarked sentence or two, added to a 20-page section copied as-is from the previous SEC filing.
What I have done
I used a free online service to compare parts of the 20-page risk factors section in the 10-Q filed on October 29, 2015 (before the crash) with the risk factors section of the 10-K filed on February 12, 2016 (after the crash). And I believe I've found news worth sharing with LinkedIn's shareholders, as well as additional clear and supporting evidence for my claimed reason for the crash (I'll leave the latter out for now as it's too time consuming for me).
Bear in mind that 99% of the text in the compared sections, filed three months apart, is identical. Here, I provide text added following the crash and not appearing in the previous SEC filing by LinkedIn.
LinkedIn warns of dilution of equity and additional expenses not foreseen before
In the stock price volatility risk factor describing all foreseen damage and risks a crash in share price would entail (as happened recently), the following text was added:
We may incur additional cash expense in connection with recruiting and retention costs, and we may also experience increased dilution because of the need to provide more equity as part of our overall compensation packages.
The problem LinkedIn "made public" with this text added on February 12, 2016, is that a material portion of the options LinkedIn provided its executives and employees in the past are quite possibly now, as a result of the crash, valueless, out of money, options.
One analyst on Seeking Alpha noted recently that LinkedIn's entire financial results are heavily dependent on and impacted by the huge stock-based-compensation it provides its employees, up to a point that "all of the cash being generated by LinkedIn is coming from paying employees with stock or stock options."
As the granting of options is a crucial commodity used by LinkedIn to recruit and retain its skilled employees, at current stock price levels LinkedIn must probably allot a staggering amount of additional options to its employees as well as increase their cash-based compensation to compensate for and replace the valueless options many of them currently hold.
If LinkedIn knows this is a material issue, and as it added that as a risk factor I presume this is the case, it should ASAP disclose the estimated impact of such planned actions on its earnings guidance, financials and dilution shareholders equity.
We know that the recent weak guidance LinkedIn provided with earnings, did not account for these "additional cash expenses" and "increased dilution," so this imminent risk LinkedIn disclosed in SEC filings should cause concern that even the weak guidance is now unachievable and optimistic guidance, if LinkedIn plans to take the steps it must to secure its talents and workforce.
I have no positions in LinkedIn's stocks and don't plan to have any. I'm not an analyst, and am expressing my own personal opinions and insights.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.