HMNY Reverse Stock Split Panic

Several people have reached out to me asking if I think there will be a reverse stock split coming to HMNY – Moviepass.  Interestingly, nobody has asked me if they think it is a good or bad idea to do it.   I guess that is because most people simply assume a reverse stock split is a bad thing.

Now that the stock price for HMNY has sunk down under the $.40 range, some are fearful that HMNY risks being de-listed from the NASDAQ.  First of all, I think it is important to say right here, we are very far away from any chance of delisting.  Very very far away.  This is something that bashers on stocktwits talk about to scare people.  But the facts are that HMNY and MoviePass are not even close to this being a real issue.  There is a long process involved in delisting a security from the NASDAQ.   Here’s a quick background on that.

If a company fails to meet a minimum closing bid price of at least $1 for 30 consecutive trading days can trigger delisting. When this happens NASDAQ issues a deficiency notice to the company.

 If HMNY receives a deficiency notice it has four business days to file an 8-K form with the SEC or to issue a press release to announce the notice. At this point, HMNY has to provide the deficiency notice’s receipt date,  and an action plan to remedy the problem.  This has not yet happened.

If HMNY does receive a deficiency notice they have 180 calendar days to return to compliance.  After that HMNY has to achieve a closing price of $1 or more for 10 consecutive trading days during this period.  Because HMNY is not a tiny penny stock and it is widely held, it also is likely HMNY will receive a second “cure period” of 180 calendar days if needed to fix the problem.  They would have to jump through some hoops with NASDAQ, but extensions are not particularly difficult to receive for a company with the size and interest of a MoviePass.  

So – we are at least a full year away from ANY serious risk of delisting.  It just is not going to happen anytime this year, or even early next year.   And, luckily for investors here, we will know pretty well if MoviePass is going to make it or not well before that point.  So next time you hear a basher say HMNY is going to be delisted.  Just say – Please Really?   That’s just dumb.

OK – Now, back to the dreaded RS – or Reverse split.   This is just another scare tactic that shorts and bashers throw around on message boards.  And it is again almost all total nonsense.   The theory is that HMNY will have to do an RS, because the share price has fallen so low that the company will be forced to do a reverse split conversion of their stock in order to avoid delisting, and or, to be able to continue with more dilution (adding more new shares) to raise funds.

I think for folks that are newer to investing, it makes sense to clarify exactly what a reverse split is.   Here is how Zacks defines a Reverse Stock Split.

“Reverse stock splits boost a company’s share price. A higher share price is usually good, but the increase that comes from a reverse split is mostly an accounting trick. The company isn’t any more valuable than it was before the reverse split. Whatever value it has is just distributed over fewer shares of stock, thus increasing the price. A reverse split can sometimes save a stock sinking in value from a delisting.”

The important thing for novice investors to realize is, stock splits, be it reverse stock splits the decrease the number of shares,  or regular stock splits that increase the number of shares, has no impact at all on the value of the company you are holding, nor does a split in either direction have any impact on the percentage amount of the company you own.

A simple example goes like this.  Let’s say you owned 1,000 shares of XYZ Company stock at $.10 a share representing $100 of value – and that 1000 shares of stock represented 1% of XYZ Company.   IF XYZ Compay did a 100 to 1 reverse split, you would now have 10 shares of XYZ stock.  (1000 /100 = 10).  And the stock would be worth the exact same $100 value you had before. Also, that 10 shares would now represent the exact same 1% of XYZ Company it represented before the reverse stock split.   Further, the total value or Market Capitalization of XYZ company would be exactly the same as it was before the stock split ever happened.   The value of the company would simply be spread out across a fewer number of shares.  Remember Market Capitalization is calculated by the number of outstanding shares X the stock price.   

So why do people fear an RS at all if it does not change the actual value of their investment or the actual value of the company they are invested in?  One argument is that an RS is a sign of a company that is shrinking or going out of business or nearing bankruptcy.   Well if you read my blog, you know that I don’t think that HMNY or MoviePass is anywhere near going Bankrupt.  That argument just doesn’t hold water for me – they have no debt!  I also think it is a stretch to think that MoviePass is shrinking, the company is growing in the 3000-5000% range.  It is a growth company plain and simple.   You can hate the business model, and you can illogically fear bankruptcy.  But you can’t argue with the growth of HMNY.

Bears and bashers of HMNY will tell you that Ted Farnsworth will do an RS and just start diluting more shares again driving the price down, and the cycle will go again and again.   This argument actually has a little more merit and possibility.   If we arrive at the end of this calendar year at 5 Million Subscribers, and we don’t have a clear line of sight to breakeven, backed by management, HMNY would risk more dilution than has already been discussed by management.   If this happens, it will be bearish for the stock.   My firm view is that when MoviePass hits 5 Million Subscribers the revenue model works for the company and that we will not have to face an ugly pivot down the road.

If we do experience an RS is it a death knell?   The data says it no.

You might find it interesting that the data on stock prices post reverse splits indicates that RS’s are at worst irrellevant, and at best helpful.   There is a ton of scholarly studies on this topic.   I found this Barron’s article the most balanced.  The upshot from Barron’s was that a company that is going fail, will fail regardless of an RS, and the converse is also true.  If a company is going to succeed, it will do so post an RS just as well.

CNBC reveals a study that says Reverse Splits tend to actually end up being good for stocks.  This study was, however, was limited to only S&P 500 stocks, so there is an obvious sample bias here by not including penny stocks.

I think the data is clear enough.  The dreaded RS is definitely not a Death Knell, in some cases, it makes sense to do it, and it is likely a neutral move to make in the worst case.

Hopefully, this will help folks calm down a little bit and not panic over a potential RS.   I doubt it will happen to HMNY, and if it does, it is not the end of the world!!

 

 

 

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