First off, let me say that Advanced Cell Technology's (OTCQB:ACTC) fundamentals and science have already been vetted -- that is, what the company does: Phase I clinical trial progress with Macular Degeneration (AMD and SMD) and the biggest current catalyst, waiting for the peer reviewed publication of its Phase I interim data. Pertinent to this article is the fact that ACT is trying to cure blindness from macular degeneration, specifically AMD and SMD, and has announced it will uplist to the Nasdaq before the end of the year, which means a reverse split.
One of the most misunderstood aspects of Advanced Cell Technology, or any OTC company, is that of uplisting to a major exchange (in ACT's case, to the Nasdaq), and the requirements that make an uplist possible. I have been reading a few ACT forums, including here at Seeking Alpha, discussing ACT's uplist timing -- specifically when ACTC should uplist -- and it's frustrating.
It's frustrating to hear erroneous and possibly irrational armchair speculation about uplisting without a hint of knowledge about what a successful uplist requires. Now, since ACTC has announced it wants to uplist to the Nasdaq, it's an easy task to look up Nasdaq listing requirements. It's right on the Nasdaq website. The problem is that uplist information on the Nasdaq site is somewhat oversimplified and could lead to misinterpretation. (Please read the Investopedia article "What are the listing requirements for the Nasdaq?" for more information.) Here are the three most important requirements (of many):
PPS of at least $4.00 (exceptions), and maintain that level for a specific time period.
Maintain at least a $1.00 share price after uplisting.
- A company must have revenue or equity, but not including dilution alone. This is not evident from the Nasdaq link, but the Nasdaq doesn't allow companies to uplist on a reverse split alone. Companies must have some sort of revenue, or way to survive, after the reverse split and uplist. They must have a revenue plan, in other words, which excludes only dilution.
The first requirement is arguable the easiest: A company simply reverse splits to $4+, done. The second is harder because that means people must believe in your company in order to maintain that price requirement for a specific time before the uplist is settled. The third is the most important because without revenue, the reverse split would quickly drop back into the sub $1 range and get delisted.
For instance, a company could tout its widget as the next big thing. They explain that all they need to do is get listed on the big board for success to happen. So they reverse split, get delisted two months later, and start dilution all over again, using the Nasdaq as a "success" condition, when in actuality it is simply a method to more dilution. The Nasdaq will not allow that to happen for at least two reasons: one, the Nasdaq makes money from listing companies and keeping them listed, and two, the Nasdaq would become a virtual OTC dilution mechanism and lose status. Coming back to No. 3, we can discount ACTC generating its own revenue for some time. So only two other options are available: funding from an outside source in the form of a loan of some sort or a huge grant, or a joint venture with a company interested in biotech, such as a large biopharma company.
Now that at least some of the bigger myths of reverse splitting and uplisting are more clear, I'd like to address two other misunderstandings related to uplisting and reverse splits: share price and possible increases to that price and ACT's possible cure of AMD blindness -- that is, what it cannot cure.
Share price and possible increases
First, let me say that this is a controversial position, and you can read for yourself the possible affects of splits, as there is much information and academic analysis on the subject: "None of these reasons or potential effects agree with financial theory, however. If you ask a finance professor, he or she will likely tell you that splits are totally irrelevant -- yet companies still do it. Splits are a good demonstration of how the actions of companies and the behaviors of investors do not always fall in line with financial theory. This very fact has opened up a wide and relatively new area of financial study called behavioral finance."
The Nasdaq allows reverse splits in order to raise share price to the required level. If splits were irrelevant, then the Nasdaq is either wrong to require the split in order to increase price, or it does matter. (Also, fund companies sometimes have minimum share price levels before they can add an equity to their funds. Theoretically, a reverse split could meet those share price requirements, even though company fundamentals have not changed.)
My position, after researching the subject, is that all things being equal, a penny stock trading at 10 cents is more likely to double than a $10 stock is likely to double (from simple volatility, for example). Now, if you don't believe that, take a look at penny stocks that double YoY (and redouble, fall back, and redouble, and so on) and stocks trading at $10 and how many times they double YoY. Yes, your net position percentage wise stays the same after any split, forward or reverse. That's a fact, but your future earnings may be impacted by a reduced share count and an equities increased share price.
I want to hammer home my point by using Apple's (NASDAQ:AAPL) recent forward split. A forward split lowers share price and increases float by the same ratio as the split. Recently, Apple forward split, reducing the price of their stock and increasing their float. From the Apple website: "Why have you decided to split Apple's stock?" "We want Apple stock to be more accessible to a larger number of investors." Translation: They want the price per share to increase, and at presplit prices, that was proving difficult (even though theoretically, it should not matter). Has Apple succeeded? It has if you look at the pre-forward split date and price and compare that to share price today. In other words, simply by forward splitting, and lowering the price per share, Apple's stock price has now increased!
For instance, let's say that ACT reverse splits at 1:100. Let's also assume that the price before the reverse split is 10 cents. That would put the price after split at $10.00. That would also mean a position that initially had 1M shares would be reduced to 10K shares. So now you have a company trading at $10 and you now have 10K shares. (Alternately, ACT could affect a 1:50 split, which would equal $5 pps at 20K shares, and you can scale the math yourself.)
If we simply look at percentages, going from .10 to $1 is 1000% increase. (We've seen ACT's pps fluctuate 100% either way on nothing more than speculation articles, or market makers doing their weekly business.) However, in order to match a 10-cent to $1 increase (which is 1,000%), a $10 equity would need to reach $100! A very low percentage of companies trading on the big boards trade at more than $100. Bank of America (NYSE:BAC) trades at $16, for instance, and Pfizer (NYSE:PFE) trades at $30.
My controversial position is that a company with real and great potential trading at 10 cents has a lot more room to run, even with a 3.3B float, than a company trading at $10 and an equally less number of float relative to a reverse split. Thus, from my perspective, all things being equal, a lower price equity has more room to run up than a more expensive one. If you find fault with that position, call out Apple and the Nasdaq's (et al.) analysts, the ones with their PhDs in economics, and argue with them, not me. In other words, my position is equal to Apple's (a lower share price will allow the share price to multiply faster than a higher share price).
Put another way, I think I stand a much better chance of making money on ACT with more, not less, shares. You can take any position you want on the subject, but do your own research on stock price increases and splits, and try not to choose irrationally. For example, Apple was not wrong. More importantly, ACT must be uplisted for financial reasons, and that is an inevitable fact. However, share count decrease can be mitigated by allowing the price to run up as far as it can after the publication, and any company announcements -- before the reverse split.
ACT's possible cure of AMD blindness -- that is, what it cannot cure
ACT's treatment cannot cure blindness when the eye's rods and cones are dead: "Ideally, scientists would like to turn stem cells into photoreceptor cells (these are the rods and cones or light-sensitive cells of the eye that allow sight). At the moment that cannot be done." The result is that ACT's stem-cell technology cannot cure some people with AMD/SMD. That means the trial results may reflect that limitation, and we'll be disappointed because there isn't a blanket, immediate cure all, be all end all to AMD/SMD blindness.
We should not be disappointed. After all of the people who are not treatable are long gone, ACT's treatment, if successful, will eradicate AMD/SMD by treating it in the stages long before rod and cone death. So, a long-term cure of AMD and SMD is still feasible using ACT's treatment. Also, according to my research, there is no manner, except for a biopsy, to determine if the rods and cones are dead, thereby negating ACT's treatment. The only way to tell if stem-cell treatment will work is a biopsy or an injection of stem cells. From my understanding, injecting stem cells is the more efficient route, rather than biopsy, which means cutting out a piece of the eye. Therefore, even if the rods and cones are dead, the treatment may be given anyway.
On the upside: One source one the site "Review of Opthamology" declares that relatively few cones are needed to sustain 20/30 vision, so that is good news for ACT's treatment.
ACT's stem-cell treatment cannot cure eyes with dead rod and cone receptors. Publication data will probably reflect that fact, but it should not be taken as a negative. ACT's treatment would still be able to treat earlier stages of AMD/SMD. If the treatment is successful, then it would put and end to AMD/SMD blindness in the future simply by stopping it before the rods and cones die.
There cannot and will not be an uplist before ACTC can prove to the Nasdaq that it can generate revenue and has a probable business plan. That means funding of some sort based on future success of the AMD trial, which in turn means the positive publication of interim Phase I results before an uplist. That means there will be no uplisting before the publication comes out, and there can be no uplisting without a probable revenue stream. (I guess it is possible that there could be a lot of backroom negotiations going on with a funding partner, ACT, and the Nasdaq that would allow it to all happen at once, and before the publication. But I have absolutely no way to support that idea and, thus, it is purely speculation.)
On the other hand, legally, ACTC can reverse split anytime it wants, since it already has stockholder approval up to Sept. 30. Beware that if ACT reverse splits without positive publication results and future funding from the prospect of a cure for AMD, an investment may become worthless. Therefore, all of those wishing for a reverse split before the publication results may be acting irrationally. That is, if someone holds their position while the reverse split takes place, and no funding is announced beforehand, they could lose everything.
Anything other than positive, clear results from Phase I trial will not generate funding interest, and a reverse split will do what it is meant to do under those circumstances-reduce float: wash out current investors and start dilution over again with new investors (in order to raise money). Put another way, ACTC just became a wash-out dilution machine. Actually, it's far worse than that. If the publication data does not show clear and positive information, ACTC will most likely liquidate. That topic, however, is beyond the scope of this article.
Disclosure: The author is long ACTC.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
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