We received news on Wednesday that ALPP was initiating a shareholder vote on whether or not to authorize management to do a reverse split. Naturally, as that word is like saying “Biden” at a Trump rally, it caused quite the stir amongst the community.
I wanted to get a short article out going through the mechanics of a reverse split and what it mathematically means for current shareholders. Then, I can get into why they’re so dreaded from an, I’ll call it “emotional” perspective.
I swear I’ve written this article before about other companies, but I’ll do it again for ALPP specifically.
Reverse Split Basics
In the proxy statement linked above, ALPP is seeking approval to a reverse split for anywhere between 1-1.5 and 1-10. Quite the range! But what does that logistically mean?
Basically, any common shareholders or people who own a derivative instrument based on common shares (generally) will have their quantity of shares adjusted. At the same time, the total number of shares is adjusted down.
To make it easy, say you own 10 ALPP shares out of the current OS count of 178,460,954, with each share worth $0.50. After the split, you now own one ALPP share out of 17,846,095. In a vacuum, the share price would theoretically increase to $5.00 as there are now less of them.
Pretty easy, right?
So to be clear – your ownership percent does not change, nothing about your ownership at all changes in the company. You own less shares in a company that now has proportionally less shares. That’s all!
Why is ALPP Doing a Reverse Split?
Quite simply, ALPP is at risk of being de listed from NASDAQ because it has not kept its share price above $1.00. The reverse split, as described above, would fix that by raising the share price. Simple as that.
Now, why all the hubbub?
Why can a Reverse Split be Bad?
Mathematically, there is nothing “bad” about a reverse split. It’s just some simple arithmetic to end up in the same place but with a higher share price. So why do we see the keyboard warriors on Twitter and Stocktwits have an aneurysm at the mere thought of a reverse split?
It’s because of the, as Dennis Reynolds would say, “implication”…
Companies generally don’t reverse split when their stock price is trending generally upwards unless they want a quick way to uplist exchanges. So usually there is a problem at the company that is necessitating a reverse split.
In ALPP’s case, their share price has been depressed for months and they’ve been below the NASDAQ share price requirement for quite some time. The reverse split, in this case, is needed because the business has been doing poorly (as implied by the share price decline), and they need to do it to stay on the NASDAQ.
But it’s really more than that. What (added: “I think”) this RS implies is that ALPP does not think that near-term filings and business results will be enough to push the share price about $1.00. In other words, good enough news is likely not on the horizon as things stand now.
So therein lies the aforementioned hubbub! Investors are now getting worried that ALPP isn’t “on the up and up” so to speak. This of course is not a guarantee, but a reverse split certainly could imply that.
I generally don’t mind a reverse split and I’m probably more in the minority on this. I’m not super fussed with ALPP’s reverse split decision. It’s not great that the share price has dropped as much as it has and that a reverse split is needed.
But at the end of the day, if you still believe in the core business over the next 3-5 years, as I still do, a reverse split really doesn’t matter. If anything, it’s probably somewhat beneficial as it keeps ALPP on NASDAQ and keeps more capital opportunities open which is always beneficial to the company.
Also, being on NASDAQ lowers liquidity risk which generally elevates share price via a lower discount rate.
Now, all of that being said, I wouldn’t say this is objectively good news by any means. Perhaps just neutral to slightly negative news. But I don’t think it’s the end of the world. I’m more focused on core business performance rather than reverse splits. Speaking of which, I’m getting antsy to get my hands on the delayed filings!
So all in all, “not so bad” is how I’d sum up this article.
Now, let me end with this… if we see one more reverse split necessary from ALPP, we may have some problems on our hands. But that would essentially mean the share price has dropped another 50-60% again already, which is really the core issue. So let’s all hope it doesn’t come to that!
Thanks for reading everyone – I look forward to writing more ALPP articles as we get new filings.
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DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I HAVE A LONG POSITION IN ALPP. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN RESEARCH.