Reverse stock splits are not new and can be a powerful, strategic, financial tool that can be used to increase a companies share price by proactively reducing the number of its shares outstanding. This can also help align with institutional investor criteria, as many funds avoid investing in low-priced stocks. Overall, such a move could improve EXRO’s appeal to a broader investment base.
For EXRO, currently with 600 million shares outstanding, a reverse split could accelerate its uplisting to the NASDAQ, improve liquidity, and attract institutional investors.
Notably, EXRO already mentioned in its merger documentation with SEA Electric that it was contemplating a reverse split post merger. This underscores its strategic intent to optimize share structure and market positioning. [Merger Slide Deck: Page 10]
What is a Reverse Stock Split?
A reverse stock split reduces the number of shares outstanding while proportionally increasing the price per share. For example, in a 2-for-1 reverse split, two existing shares are consolidated into one, doubling the price of each share. If a company’s shares are trading at $1 before the split, the price would theoretically rise to $2 post-split but investors would hold half as many shares. The overall market capitalization (shares outstanding x price/share) of the company remains unchanged.
Additionally, it should be noted that all outstanding securities for a stock, including common shares, preferred shares, options, and warrants, are reduced proportionally to maintain their relative value. The impact on EXRO’s tradable warrants is discussed in detail later in this article.
Reverse splits are often used to achieve specific goals, such as meeting minimum price requirements for stock exchange listings or improving the perceived value of a company’s stock.
Why Would EXRO Consider a Reverse Split?
Uplisting to NASDAQ
EXRO currently trades on the OTCQB market in the U.S., which, while reputable, lacks the visibility and institutional investor interest associated with major exchanges. On November 8, 2021, EXRO announced it had applied for NASDAQ listing, and in it’s letter to shareholders on February 9, 2022, confirmed the company had received ‘conditional’ approval for uplisting. However, EXRO has not yet proceeded with the uplist, citing ‘market conditions and timing’ as key factors.
Uplisting to NASDAQ offers several benefits:
- Increased Exposure: NASDAQ-listed companies enjoy greater visibility among investors and media.
- Institutional Investment: Many funds, such as Fidelity and Vanguard, avoid stocks trading below $5 or outside major exchanges.
- Improved Liquidity: Higher trading volumes on NASDAQ make buying and selling shares easier for investors.
Determining the Optimal Split Ratio
The table below outlines how different split ratios would impact EXRO’s share price and liquidity, helping to evaluate the most balanced approach.
Reverse Split Scenarios
| Split Ratio | Pre-split Price | Post-split Price | Pre-split Shares | Post-split Shares | Liquidity Impact |
|---|---|---|---|---|---|
| 2-for-1 | $1.00 | $2.00 | 600 million | 300 million | Moderate impact |
| 5-for-1 | $1.00 | $5.00 | 600 million | 120 million | Balanced impact |
| 10-for-1 | $1.00 | $10.00 | 600 million | 60 million | High risk |
As we can see a 5-1 reverse split once EXRO achieves a trading price of $1.00/share would provide a well balanced approach of increasing the share price while still maintaining an adequate amount of freely trading shares to support liquidity. Variations near that ratio and price could achieve similar results.
Statistical Outcomes of Reverse Splits
Understanding the broader trends and outcomes of reverse stock splits can provide valuable insights for EXRO and it’s shareholders as they consider this strategy. Data on companies that have implemented reverse splits reveals both challenges and opportunities:
Short-Term Performance
- 54% Experience Price Declines: Research indicates that approximately 54% of companies see their stock price decline within three months following a reverse split.
- Mixed Returns: The average price gain during this period is 16%, but the median result is a 10% loss, showing variability in outcomes.
- Source: The Pattern Site
Long-Term Viability
- High Risk of Delisting or Bankruptcy: A study of 1,206 firms that conducted reverse splits found that within five years:
- 11% were acquired by another company.
- 47% faced bankruptcy or delisting due to failing to meet exchange standards.
- Source: Science Direct
General Underperformance
- Underperformance Relative to the Market: Analysis of the Russell 3000 index shows that stocks undergoing reverse splits experience an average 90-day loss of 4.77%, compared to a positive 4.67% return for all stocks over the same period. Source: Stocksoft Research
Implications for EXRO
Given these statistics, a successful reverse split requires a well-thought-out strategy, including:
- Strong Fundamentals: Ensuring the company’s financial health and operational growth are robust enough to support a stable stock price post-split.
- Transparent Communication: Clearly outlining the rationale behind the split to reduce investor uncertainty and build confidence.
- As stated in EXRO’s merger documentation with SEA Electric, a reverse split is a tool the company is considering in conjunction with broader growth strategies. This transparency reinforces the narrative that the split is part of a well-planned roadmap, not a reaction to financial distress.
- Strategic Timing: Aligning the split with positive developments, such as product launches, customer contracts, purchase orders, or major partnerships, to counteract potential negative sentiment.
Managing Liquidity and Share Price
Liquidity is critical for maintaining investor confidence:
- A moderate split, such as 5-for-1, ensures enough shares remain for active trading. For institutional investors, this helps maintain the necessary volume to execute large trades efficiently without causing price instability.
Liquidity influences the behavior of both retail and institutional investors in different ways, as outlined below
- Excessive reduction in shares (e.g., 10-for-1) risks low trading volumes, deterring retail investors and widening bid-ask spreads. Retail investors may find it harder to buy or sell shares, while institutional investors might face higher transaction costs and reduced flexibility.
By referencing a reverse split in its merger plans with SEA Electric, EXRO has already begun laying the groundwork for this action, signaling its intent to create a stronger, more liquid market for its shares.
Addressing Post-Reverse Split Share Dilution
It’s important to note that while a reverse stock split consolidates shares to increase the per-share price, it doesn’t inherently change a company’s market capitalization or underlying value. Subsequent share dilution, through issuing additional shares, can undermine the intended benefits of a reverse split by decreasing earnings per share and potentially lowering the stock price.
However, some companies have successfully implemented reverse stock splits without engaging in further dilution, maintaining shareholder value and achieving their strategic objectives.
Examples of Companies Maintaining Share Integrity Post-Reverse Split:
Citigroup Inc. (NYSE:C):
- Reverse Split Details: In May 2011, Citigroup executed a 1-for-10 reverse stock split, reducing the number of outstanding shares from approximately 29 billion to 2.9 billion. Stock Split History
- Outcome: This move increased the share price from approximately $4.50 to over $40, meeting listing requirements and improving investor perception. Notably, Citigroup reinstated a quarterly dividend of $0.01 per share following the reverse split, signaling financial stability and further reinforcing investor confidence. Morgan Stanley Analysis
Booking Holdings Inc. (NASDAQ:BKNG):
- Reverse Split Details: In one of the most famous rebounds, Priceline Group as it was known at the time, underwent a 1-for-6 reverse stock split on June 16, 2003, increasing its share price from approximately $6.60 to around $35. Stock split history
- Outcome: Post-split, Booking Holdings’ stock continued to perform well, with the company focusing on its core business, Booking.com, which now contributes the majority of its revenue. The company did not engage in further share dilution, preserving shareholder equity. Skift Business Analysis
- As of this post, the company is trading around $5000/share!
GE Aerospace (GE electric) NYSE:GE
- Reverse Split Details: Even closer to home, EXRO’s CEO’s former employer recently engaged in a reverse split. In 2021, GE executed a 1-for-8 reverse stock split Stock Split History
- Outcome: This move increased the share price from approximately $13 to over $105, and today it is trading around $170
These examples demonstrate that a reverse stock split, when executed without subsequent share dilution, can effectively achieve objectives such as meeting listing requirements and enhancing stock appeal. For EXRO, considering a reverse stock split without additional share issuance could be a strategic move to increase share price and attract a broader investor base, provided it aligns with the company’s long-term goals and market conditions.
Lessons for EXRO:
Aligning a reverse split with strong fundamentals, positive developments, and transparent communication ensures the action is seen as part of a growth strategy rather than a sign of distress. However, we would be remiss if we did not point out that not all reverse splits yield positive results. For instance:
Nikola (NASDAQ:NKLA):
- Reverse Split Details: In June 2024, Nikola executed a 1-for-30 reverse stock split to address its low share price and avoid delisting from Nasdaq. Stock Split History
- Outcome: Following the reverse split, the stock opened at an adjusted price but fell 16.5% on the first trading day, closing at $8.78 (equivalent to $0.29 pre-split). Despite the adjustment, the share price continued to decline. As of January 2025, Nikola is trading at $1.22, reflecting ongoing challenges in stabilizing its valuation and regaining investor confidence.
DryShips Inc. (NASDAQ:DRYS):
- The company implemented multiple reverse splits over a short period, leading to significant dilution and massive shareholder value destruction. [Chart]
These examples highlight the importance of avoiding excessive dilution or poor timing, which can exacerbate negative investor sentiment.
Investor Perception of Reverse Splits
Reverse splits can evoke mixed reactions from investors. While they can be a sign of strategic planning, they also carry potential negative connotations. Understanding investor perception is crucial to ensure a successful implementation.
Negative Perceptions:
- Sign of Financial Distress: Reverse splits are sometimes viewed as a last-ditch effort to boost a company’s stock price, potentially signaling financial struggles.
- Dilution Concerns: Investors may fear future dilution, especially if a reverse split precedes new equity issuances.
- Historical Trends: Studies suggest that companies performing reverse splits sometimes see their stock price decline over time if not supported by strong fundamentals or positive news.
Positive Perceptions:
- Strategic Uplisting: Reverse splits aimed at meeting exchange requirements, like NASDAQ’s $4 minimum bid price, often signal growth and a move toward greater visibility.
- Market Realignment: By improving share price, reverse splits can attract institutional investors, many of whom have mandates preventing investment in low-priced stocks.
- Clear Communication: Companies that transparently communicate the rationale for a reverse split can mitigate investor concerns and reinforce confidence.
Institutional Investor Criteria
Institutional investors often follow strict mandates that influence their investment choices. These mandates frequently include:
- Minimum Share Price: Many funds avoid stocks trading below $5, as they’re often deemed too risky.
- Liquidity Requirements: Institutions require stocks with high trading volumes to accommodate large transactions without causing price volatility.
- Market Capitalization Benchmarks: Funds typically favor companies meeting specific size thresholds, signaling stability and growth potential.
Examples of Institutional Behavior:
- The Vanguard Group: Prefers highly liquid stocks for seamless transactions and lower trading costs.
- BlackRock: Focuses on stocks with sufficient daily volume to handle large investments efficiently.
- ARK Invest: Targets growth companies but emphasizes those with accessible liquidity for scalable portfolio additions.
By addressing these criteria, EXRO’s reverse split could position it as a more appealing option for institutional investors.
Considerations for EXRO
When determining a reverse split ratio, EXRO must consider its goals:
- Stock Exchange Compliance: If EXRO aims for a NASDAQ, a reverse split may help meet price thresholds.
- Investor Base: Balancing institutional and retail investor interests is crucial.
- Market Perception: A reverse split should convey growth and strength, not financial distress.
Impact on EXRO Warrants
Reverse splits affect outstanding warrants similarly to shares: the exercise price increases proportionally to the split ratio, and the number of warrants held decreases by the same ratio. Importantly, the value of the warrants remains unchanged because the adjustments to the exercise price and the number of warrants offset each other. This ensures that warrant holders retain the same potential economic benefit. For instance:
- If EXRO implements a 5-for-1 reverse split, the exercise price of its $0.42 warrants (expiring September 13, 2027) would increase to $2.10, and the number of warrants held would decrease to 20% of the original amount. The total cost to exercise all warrants, and the total number of shares received upon exercise, remain equivalent to the pre-split terms.
Additionally, it is important to note that EXRO’s $2 warrants, set to expire on February 4, 2025, will no longer be outstanding by the time a reverse split could realistically take place. This removes them from consideration in any reverse split analysis.
Alternate Requirements for NASDAQ Uplisting
Typically, to qualify for listing on NASDAQ, EXRO would need to meet specific criteria, including a *minimum bid price of $4 per share, and a reverse split could help meet this requirement.
However, while the $4 minimum bid price is a well-known requirement for uplisting to NASDAQ, there are alternate pathways that companies can explore. These alternatives involve meeting specific financial or operational benchmarks, thus offering flexibility for companies with lower share prices.
EXRO’s potential reverse split strategy may align with the standard uplisting criteria, but it’s worth noting the alternatives routes could play a role in future planning. We’ll be diving deeper into these alternate requirements in an upcoming piece.
Exchange Rules Regarding Reverse Splits
Key Considerations for Reverse Stock Splits on the TSX:
- Shareholder Approval: Companies listed on the TSX typically require shareholder approval to execute a reverse stock split. This ensures that shareholders are informed and consent to the consolidation of shares.
- Regulatory Filings: Firms must file the necessary documentation with Canadian securities regulators, detailing the terms and rationale behind the reverse stock split. This transparency helps maintain market integrity and investor confidence.
NASDAQ Rule Changes and Their Relevance to EXRO
NASDAQ has implemented several updates that directly impact reverse splits, particularly for companies pursuing uplisting:
- Minimum Bid Price Compliance:
- NASDAQ requires a sustained minimum bid price of $1 for 30 consecutive trading days. Reverse splits intended to meet this threshold are now reviewed for their ability to ensure long-term compliance. For EXRO, this emphasizes the need to align a reverse split with strong business fundamentals to maintain the higher price. (NASDAQ Rulebook)
- Repeated Reverse Splits:
- NASDAQ discourages multiple reverse splits within a short timeframe, as these can erode investor confidence. For EXRO, this means a single, well-timed split is crucial to avoid regulatory scrutiny and market skepticism. (NASDAQ Filing on Reverse Splits)
- Enhanced Disclosure Requirements:
- Companies must provide detailed reasons for a reverse split and outline its expected outcomes. This ensures transparency and helps shareholders understand the strategic intent. For EXRO, clearly communicating the rationale, such as achieving NASDAQ uplisting and appealing to institutional investors, will be key. (NASDAQ Rulebook)
While the NYSE has also updated rules related to reverse splits, such as focusing on long-term compliance and limiting extreme ratios, these changes are less relevant to EXRO’s strategy, as its primary focus remains uplisting to NASDAQ.
Impact on EXRO
These rule changes emphasize the need for strategic planning when executing reverse splits. For EXRO, this means:
- Ensuring any reverse split aligns with NASDAQ’s compliance framework, including maintaining a minimum bid price over time.
- Avoiding repetitive reverse splits by tying the action to strong business milestones and financial performance.
- Providing transparent communication to investors about the rationale, process, and expected benefits of the reverse split.
By addressing these regulatory updates proactively, EXRO can position itself to meet listing requirements while maintaining shareholder confidence and market credibility.
Looking Ahead
A reverse stock split could serve as a pivotal move for EXRO to meet NASDAQ listing requirements, attract institutional investors, and enhance its market presence. By carefully selecting the ratio—such as a 5-for-1 split—and tying it to milestones like those referenced in its SEA Electric merger documentation, EXRO can balance share price improvement and liquidity. Transparent communication and strategic timing are essential to ensuring investor confidence and achieving long-term growth.
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