In the last week I’ve been asked repeatedly (and sometimes by the same people) if I’m planning to reverse split laborSMART’s stock ($LTNC) soon. This is not an unreasonable question for someone to ask given our price per share (triple zero nothing), our float size (a bazillion shares), and the venue we trade on (pinksheets, aka the gutter of Wall Street).
My response: No.
Easy enough? Right? Right???? Not quite.
Again, in the defense of these folks, they’ve “seen this situation before.” I can’t blame them for their fear and/or disbelief. In the last 15 years I’ve personally seen my position in at least three different companies get completely wiped out by a reverse split (and the subsequent drop to 0 and then yet another reverse split). There’s a reason why “reverse split” is the second most feared phrase for OTC investors (“halted” is probably the first).
To address this fear, uncertainty, disbelief, greed, or any other emotion that may be driving this question as it relates to laborSMART, I feel it best to maybe explain “Why” I’m not planning a reverse split any time soon.
A reverse split is one of many possible corporate actions. Corporate actions should be looked at as tools, or in some cases, weapons. Most corporate actions have little measurable accounting affect on anything other than on paper. A forward split doesn’t change the value of the company. A reverse split doesn’t change the value of the company. A dividend, doesn’t change the value of the company (well, actually it reduces the value of the company after the dividend is paid!).
But that’s the surface level view. Below the surface, a corporate action can shape public perception and create opportunity. This perception and potential opportunity will ultimately influence the demand for the stock and the price it trades at relative to the supply available.
For example, when $LTNC first started trading it was highly illiquid with a huge spread. In hindsight, a forward split could have done wonders for improving liquidity and creating a more efficient market for the stock which in turn could have resulted in much less dilution as the company raised capital.
As I said, corporate actions should be viewed as tools and weapons. Each tool in my garage has a specific intended use. Each weapon in my closet has a specific intended use.
So with that premise and my belief that corporate actions must be used strategically, what strategic reason would laborSMART have for doing a reverse split?
Reasons to do a reverse split and why laborSMART doesn’t have one:
- Reduce shareholder count by cashing out small holders- A reverse split can be used to force an immediate cash out to anyone with partial shares. Do a big reverse split and you can substantially reduce your shareholder count by cashing out small shareholders (example, laborSMART has over 200 shareholders with just 10,000 shares or less). Reducing the shareholder count reduces costs for mailings, proxies, etc. Companies that use this tool sometimes will immediately do a forward split right after, as the strategic reason is just to reduce the shareholder count and not necessarily affect the stock price.
Why laborSMART does NOT have this as a valid reason for a reverse: The amount of money we spend on mailings doesnt even move the needle relative to what we spend with accountants and lawyers. I’d fire the lawyers and accountants before trying to save some money on stamps.
- Increase price per share to raise capital through private placement or registered offering-Yes its true, public companies sell stock to raise capital. Doing a reverse split to raise capital is not a horrible idea so long as there is a very liquid market for the stock and the raise is committed to by new investors, prior to the reverse.
Why laborSMART does NOT have this as a valid reason for a reverse: If we were to announce a reverse split, the price per share would most definitely drop substantially before and after the split. The corresponding effect would be that our market cap would shrink substantially. Imagine trying to raise $2-3 million with a market cap of just $1 million. I went through this before in 2013 when we actually had a respectable stock price, but the market cap was just $10 million. My field trip to Wall Street resulted in nothing getting done because no one wants to do an equity deal for stock they can’t sell freely (anything above 10% ownership has liquidation restrictions). So doing a reverse split at present time to raise capital through equity sales would not result in a succesful raise, and therefore, pointless to reverse for this reason.
- Increase price per share to raise capital through convertible debt financing-Trading on the OTC, the only money that gets raised quickly and cheaply is through people you already know who are wealthy, or through convertible debt financing. Hopefully, recent legislative changes to capital raising rules will make other financial instruments more accessible to growing companies.
Convertible debt in itself is not toxic. A convertible note is only going to be as toxic as the note holder. Unfortunately, there are lots of toxic note holders, and even if you have a note with your best friend, short term anomolies in the trading of the stock can have a dramatic affect on conversion prices, not to mention income statements and balance sheets due to derivative liability (that accounting voodoo).
Why laborSMART does NOT have this as a valid reason for a reverse: We already have notes with pretty much every convertible debt fund that invests in the OTC, all of the notes are past original maturity, and we’ve negotiated away their conversion rights. From a realistic standpoint, I doubt any of them would be interested in a potential replay of the last 12 months. I certainly am not. The deals we have in place will have them all getting paid out without any substantial losses, but they don’t exactly do convertible debt financing to break even and the amount of financing we would need to discuss to move the needle would be substantial. These funds generally like to limit their exposure to under $500,000. Even if we wanted to go this route, it just wouldn’t get done realistically. Therefore, pointless to reverse split for this reason.
- Increase price per share to make the stock more attractive to the investment community-Contrary to popular belief, there are many institutional investors that buy stock in OTC companies. In most cases, there are price per share minimums as part of their charter. A company could do a reverse split with the idea that it would attract investors that would take large positions in the company, likely moving the price per share up further, and adding liquidity to the stock. This reason for doing a reverse would usually be coupled with the intent of doing a capital raise in the near future.
Why laborSMART does NOT have this as a valid reason for a reverse: This isn’t a bad idea. However, we have a small market cap. If we were to do a reverse split now the market cap would shrink before and after the split (see also #2). A large investor could take advantage of this short term drop in price after the reverse split, but would not be able to take a sizeable position without moving the price up in a dramatic fashion and likely overpaying for the stock. Large investors are not in the habit of overpaying for stock, particularly if their buying is what is causing the stock to rise.
- Increase price per share to uplist: Every exchange (that I know of) has a minimum price per share requirement to be listed, among other things. Many companies will do a reverse split prior to application for an uplisting or as a condition of being approved for uplisting. This is not a bad idea either. Moving to a national exchange has lots of benefits such as ability to raise capital at a cheaper cost, increased liquidity, and prestige.
Why laborSMART does NOT have this as a valid reason for a reverse: It has always been, and still is, my intent to eventually have laborSMART become a NASDAQ traded company. In fact, we only lack 2 of the necessary requirements (last I checked). Those being equity and price per share. Simple enough! Do a capital raise (to meet equity requirement) and a reverse split (to meet price per share requirement) and BAM! Done. NASDAQ here we come!
Not so fast. Please see items #2 and #4. We actually filed an S-1 to raise around $17 million in February of 2015. In the S-1 we laid out our intent to do a reverse split coupled with an uplisting to the NASDAQ when we closed on the funding. We had a middle tier investment bank that was ready to underwrite and we went through the entire due diligence process. In fact, we got our first round of comments back from the SEC and there were just 7. Ask anyone who has ever done an S-1 registration with the SEC and how many comments they received on the first round. It’s way more than 7.
So why didn’t this get done? When the investment banker, myself, and the attorney who drafted the S-1 concluded we could get this funding and uplisting done, our stock price had yet to be severly impacted by dilution. By the time the investment bank had completed due diligence, masive dilution had set in and our stock was trading at .0001. Basically, items #2 and #4 were now reasons it made no sense to do a reverse split. Bad timing.
Hopefully this answers some questions for some people, and hopefully it settles any concerns regarding laborSMART and reverse splits. If the above breakdown isn’t enough to squash the idea that we might do a reverse split, a simpler answer is: I don’t want to and no one can force me to do one. I have voting control of the company and I will never approve a reverse split without a logical, strategic reason for doing so.
I will always do what’s necessary for the company to survive and thrive, even if it means making an unpopular decision. The quick and easy way out of the convertible debt would have been to just reverse the stock when it dropped to .01, and then reverse it again if there was still pending conversions.
Countless long term investors would have taken losses that would never be recoverable. There are employees, clients, families of employees and families of clients, and hundreds of small investors, that have invested and continue to invest in laborSMART stock. Rarely in life are the “quick easy ways” also the “right ways.”
I don’t mind taking the long way.
