The continued listing price requirement of $1.0 or greater on NASDAQ, NYSE and other exchanges can be a strong influence on share price for companies teetering around the mark. The requirement can be a source of anxiety and motivation for companies to maintain/increase share price through solid financial turnaround, rushed catalysts to indicate coming profitability or increased profitability and other means of increasing investor interest/demand for their common stock.
Conversely for shareholder value, it can also be incentive for reverse splits for those companies whose share prices continue to trade under the listing requirements for an extended period of time. Although companies may delay the process through a series of appeals and hearings; ultimately, share price must be increased in some legitimate manner.
Investors willing to perform the proper amount of research into these companies and are willing to risk the downside of reverse splits (especially in the sub $1.0 range) may find good upside potential here. For investors buying in at just over the $1 mark, the downside could also be substantial due to the number of stop limits most likely implemented by investors that are activated at or just under the psychologically and regulatory-relevant price.
Houston American Energy Corporation (NYSEMKT:HUSA) has had a devastating year, resulting in a plummet from its 52-week high of $20.41 to its current share price of $1.00 at market close on Friday, July 13th. A small energy company focusing on natural gas and oil wells, the company had a huge setback and reported on March 1st of this year that its Tamandua #1 well, which should have been wrapped up by that point, had geological problems with its drilling, resulting in termination and plugging of the well in Colombia. The news resulted in a price plummet from $10.84 down to $7.00. In an April 19th announcement, the company further confirmed issues with the C7 and C9 formations at the same sidetrack well.
However, hidden in the press release was a statement indicating other issues possible for the company. The issue was in the form of the statement:
The Company also confirmed that the Securities and Exchange Commission (SEC) is conducting a non-public formal investigation into the Company. The Company confirmation of such investigation follows receipt of information by the Company that third parties had become aware of the investigation.
Other bad news from a July 5th press release spelled more delays to upside potential for the company with negative tests from oil swabs taken from its Cachirre #1 C9 sand. The company stated that it will plug the well and move onto its Zorro Gris well location which will be the next likely catalyst for the company.
Although suffering through a year of bad news and more recently possible litigation from major shareholders, the upside for HUSA can be great with a $37.37 million market cap at the time of this article. With potential catalysts possible, upside and downside can be great for the company. With the SEC and now the judicial system watching the company closely, it will likely "walk the straight and narrow" at least for the interim and represents much upside from here if it only moves back up to the $1.25 support (now resistance) level of July 5th or its $1.50 support from June.
Chelsea Therapeutics (NASDAQ:CHTP) has also had a devastating year with a 52-week high of $6.00 and is currently trading at $1.11 with a market cap of $74.4 million. The fledgling biotech, seeking its first marketable product, received a Complete Response Letter (CRL) from the FDA and announced on March 28th that the regulatory entity is requesting additional information from another positive study supporting the efficacy and additional 2-3 month durability of effect for its lead candidate, Northera. With a large marketing potential,
Northera is intended to treat symptomatic neurogenic orthostatic hypotension in patients with primary autonomic failure (Parkinson's disease, multiple system atrophy and pure autonomic failure), dopamine beta hydroxylase deficiency and non-diabetic autonomic neuropathy. The condition manifests itself via lightheadedness, dizziness, blurred vision and/or fainting when a person assumes a standing position and can result in injury due to potential associated falls and loss of balance. The phase III data from the recently completed trial indicated good efficacy with a statistically-significant P=0.003 outcome. The already-underway 306B study for Northera could provide sufficient efficacy/durability data and the company will stop enrollment in the trial sometime in July to facilitate data analysis by year-end. Newly-implemented cost-cutting measures will save the company $3.5 million dollars annually while the company evaluates any additional trial designs necessary to gain regulatory approval. While this is a setback for the company, it does provide new investors a good entry point into a small pharmaceutical company with a late-stage drug that seems ready, based on one completed trial, to have the necessary safety and efficacy to gain regulatory approval.
Powerwave Technologies (NASDAQ:PWAV) designs, manufactures, and markets end-to-end wireless solutions for wireless communications networks (mostly cellular towers) with products such as antennas, tower mounted amplifier products, base station solutions and coverage solutions. With a 52-week range of the currently-trading $0.65 to the high of $12.20, the upside here could be good for this restructuring $20.9 million market cap communication equipment company. The company has already had one recent reverse split in the form of a 1-for-5 reverse split on October 2011. Poor revenue and a faltering business model over the last year or so have greatly diminished the company's profitability and investor confidence. With the recent reverse split not even a year away, the company should be trying to "pull a rabbit out of its hat" in order to get the share price back over a dollar, over 50% away from its current share price and 52-week low of $.65.
Technical analysis indicates that $1.0 is the next large resistance area in the stock with lesser resistance at $0.70. A close above the latter price could be construed as bullish with a decent upside as the company continues to restructure. With about $44 million in cash with net inventories of about $83 million at the end of the first quarter, the company is struggling to survive. An April 25 press release from the company offers investors some hope as Powerwave announced it had sold its Chinese manufacturing facility to Shenzhen Tatfook Technology for $12.5 million and had agreed to a long-term supply agreement helping to ensure Powerwave's future as indicated in the announcement
Powerwave will license Tatfook to manufacture and sell selected antenna and tower mounted amplifier products within the China market under a license and manufacturing agreement. Tatfook will pay an upfront license fee of US$5 million under the license and manufacturing agreement as well as ongoing royalty fees on future product sales. Also upon closing of the transaction, Tatfook will enter into a strategic supply agreement with Powerwave where Powerwave can benefit from Tatfook's low cost structure and strategic manufacturing capabilities.
The aforementioned companies each represent phenomenal upside potential and downside risk for investors. Positive news indicating turnaround for any of these companies can present impressive upside as indicated by the 52-week highs for each of these. However, with financials in question for each of these, the downside risk is also great. Wise stop limits are advisable for any investment; however, there is no guarantee these sells would activate quickly enough to protect from substantial loss in the event there is a catastrophic drop in share price. HUSA and CHTP are both trading over $1 at the time of this article, and many investors are likely already placing bets on the hope that the bottoms are now in and they could trade at and above that level as the share price stabilizes.
Investors are advised to perform their own research on these companies and their likelihood at profitability in the upcoming months and look for potential catalysts. CHTP has a good chance of success with Northera per its completed phase III trial data. Additional efficacy and durability data will likely confirm the original data set, but the question of when still remains with the company's cash position dwindling although at a much reduced rate due to company restructuring. HUSA's short term hopes depend on finding oil at Zorro Gris' CPO 4 well. Failure there may further degrade shareholder confidence in the company and its business strategy.
HUSA's total assets as of March 31st totaled $31.6 million with the company having about $2.95 million in cash at that time compared to $9.93 1Q 2011. In order to remain listed on NYSE, to gain shareholder confidence and to reach profitability, HUSA needs to make big changes and in a hurry as the SEC and now judicial officials are both watching the company with an eagle eye.
PWAV's situation is also grim. The company is showing signs of improvement but is over 50% away from the critical $1 mark in order to regain compliance without yet another reverse split. Caution is urged in investing in each of these companies with upside and downside potential being great for each.
Disclosure: I am long HUSA.