Thursday, August 11 2022

Reverse stock splits prevent delisting. But some didn’t even go that far and went bankrupt, like, WOW, that was fast.

By Wolf Richter for WOLF STREET.

Hippo Holdings, one of the “insurance tech” unicorns that went public through a merger with a SPAC and whose stock later crashed. Announced on July 20 in a proxy statement that it would hold a special meeting of shareholders on August 31 via live webcast to obtain shareholder approval for a reverse stock split “in the range of 1 for 20 at 1 by 30”.

On July 19, Hippo disclosed that it had received a delisting notice from the New York Stock Exchange because the stock price had been below $1 for more than 30 business days in a row. And for the share price to rise above the exclusion line, the company said it would take reverse action.

This is hippo action [HIPO] since the announcement of the merger with a SPAC in March 2021. The merger at a “valuation” of $5 billion was approved by shareholders on August 2, 2021. Less than a year later, there is the reverse stock split . Stocks closed at $0.80 today, down 93%, and it’s all been one big horror show at the end of the craziest stock bubble in history, as documented in my column, Stocks Imploded.

If Hippo does a 1-for-20 reverse stock split, shareholders of record as of July 18 will have their shareholding reduced by 20. If I have 1,000 Hippo shares before the reverse stock split, I will have 50 shares afterward. And the shares, instead of being worth $0.80, will be worth 20 times more for a moment, $16. In terms of dollars, I go out even for a moment.

What happens next in the market, as we learned during the dot-com crash, is that stocks often continue to sink because there is now so much more room under them to sink. But at least it avoids delisting for a while.

If the company can’t figure out a way to become cash flow positive and therefore continues to burn cash, it will need to come up with new funds that it can incinerate, and that’s very difficult in the current climate. Or maybe another company buys it for scrap.

If those two options don’t materialize, then one day, after all the cash has been burned, the company is gone, and everyone had a good time during the party, except for the investors who ended up holding the vomit bag.

That $1 delisting threat hangs over many companies that have recently gone public through a merger with a SPAC or through an IPO. And there will be plenty of delisting disclosures and plenty of reverse stock split announcements, if the companies go that far. And many won’t and will file for bankruptcy instead. And some already have.

Enjoy the technology [ENJY], a delivery startup with a very fancy website, is one of those that didn’t even get to a reverse stock split. It went public via a SPAC in October 2021 and then went to hell pretty much in a straight line, pretty much violating WOLF STREET’s adage that “Nothing goes to hell in a straight line.”

On June 17, he revealed that he received a delisting notice. On June 30, he revealed that he filed for bankruptcy. By now, the stock is gone, already delisted and trading over the counter at $0.12. It will eventually go to zero, and end users will have to ask their brokers to remove the shares from their account if they tire of looking at them after a few years.

last electric mile (EV conversions) never got to a reverse stock split either; filed for bankruptcy in June, a year after its merger with SPAC, and the shares are gone, now at $0.12 over the counter, and will go to zero.

digital traveler (crypto platform), which went public last year with the main listing in Canada, also did not go through a reverse stock split. On July 6, it declared bankruptcy in the US after freezing its clients’ deposits.

SoFi Technologies [SOFI] last week it already obtained shareholder approval for an eventual reverse stock split, if the company decides to go that route. The company started out as a student loan operator and stock trading platform, later moving into cryptocurrency trading. In early 2021, it was merged with one of the Chamath Palihapitiya SPACs. The shares peaked at $28.26 in February 2021, giving it a market capitalization of around $25 billion. Since then, the shares have plunged 75% to $6.97. And $18 billion in market cap has vanished. In the first quarter, the company lost $115 million, but the shares remain well above the exclusion line for now.

metromile [MILE], another AI unicorn SPAC insurance tech that lost a ton of money, this one specializing in auto loans, is a good candidate for a delisting notice and reverse stock split. It is currently trading at $1.05 and has traded as low as $0.75. If it trades below $1 for 30 days, be prepared:

Among our other imploding stocks, SPAC and IPO heroes that have at least temporarily dropped near or below $1 are:

  • Vroom [VRM] (used car dealer)
  • technologies of change [SFT] (used car dealer)
  • cazoo [CZOO] (UK used car dealer). Currently at $0.57 a new low. Losing money, cutting jobs, the whole thing.
  • Velodyne Lidar [VLDR] (EV Technology)
  • electrical center [CENN] (Australian lingerie brand that switched to electric vehicles)
  • metal desktop [DM] (3d print)
  • buzz [BZFD] (online publication)
  • dave inc [DAVE] (Mark Cuban-backed personal fintech), now at $0.68.

A reverse stock split does not solve the company’s viability problem. It only resolves the delisting threat at least for a while. If the company can’t get their act together and generate positive cash flows, it will still go out of business and the stock will continue to drop to zero, even after the reverse 1 per gazillion stock split.

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