Does a reverse split have an adverse effect on share price? I don't know. Here's my problem. If a company's shares steadily (more or less) fall from a dollar to ten cents, it is probable that the company is still on a continuing slide, whatever the reason for that slide may be. If so, then the chances are the shares will continue to drop whether or not there is an RS, at least until circumstances change for the better. So the share price drops to 9 cents then to 8 and so on.
If the company adopts a one for ten RS, the situation is then a share price of $1 instead of ten cents. But, of course, the shares are on a continuing decline, and the price will probably slide to 90 cents and then 80 cents and so on. In such a situation it is tempting to blame the RS for the continuing decline. Fallacy of "post hoc, propter hoc." This makes it difficult to judge RS's on the basis of what happened to such cases in the past.
One might naturally feel that if splits are good then reverse splits must be bad. But this argument is not sound. Splits normally take place when prices have risen to the point that small investors have difficulty in trading them. They are "good" in that their lower price makes it easier to trade them. Such a situation does not exist with penny stocks.
There is one advantage of a reverse split. A 50 cent stock is less liable to fluctuate as much as a 5 cent stock. If a stock is at 5 cents it has to go to 4 cents or to 6 cents in order to move at all (I understand that the ASE does not allow half cent prices any more). That is a shift of 20% one way or the other. A fifty cent stock can move to 49 cents or 51 cents. That is a shift of only 2%.
Incidentally, if the stock does continue to decline, it does not look as serious when the changes are in steps of 2% as it does when the steps are 20%
As far as Jaba is concerned, it seems to me that the immediate problem is the lack of working capital. If we take the assets as shown on the balance sheet at their face value, we seem to have net assets of about 17 cents per share. Unless we have reason to reassess the value of the existing properties it would seem that it is a question of how long we need to wait until we find interested partners.
Although we have very little cash, the burn rate is low. At 5 cents a share and assuming issued shares total 25 million, I calculate the present capitalization as $1,250,000. Would a million dollars tide us over until there is a positive strike? That would require placing a further 25 million shares at, say 4 cents. Our interest would be diluted to one half, but it would be one half in a company that had some working capital.
I doubt whether it would be practical to make such a placement with shares at their present price. But with shares at 50 cents, I suppose a placement at 30 or 40 cents might be feasible. This is probably optimistic. There might need to be goodies attached (such as share warrants).
John |
