Pandora's market

W ORCESTER $1.25

October 2, 2006 • Volume 17 Number 17

The Business Newspaper for Central Massachusetts / Metrowest

Pandora’s market Nasdaq rules pose threat to companies with low share prices B Y K E N N E T H J . S T. O N G E

rom Franklin to Gardner to Southboro, at least three local companies have spent a good part of the last year restructuring to comply with a Nasdaq rule prohibiting share prices from dropping below $1.

The reason: Nasdaq’s “minimum bid price” rule, which states companies’ shares cannot fall below that threshold for more than 30 days. Any stock that does so risks being delisted from the exchange. Those that are typically trade on the “penny stock” exchanges - the Nasdaq-run Over the Counter board, or the Pink Sheets.

Although there is a lengthy appeal process before delisting, winning is unlikely if a company’s share price remains below $1. And companies are anxious to avoid delisting because investors are far more cautious about penny stocks, which tend to carry higher risk and are characterized by less-strict reporting and corporate governance requirements.

James Angel, an associate professor of finance at Georgetown University, says that the large majority of companies in danger of being delisted eventually are. They end up folding or merging with another entity within two

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F E AT U R E continued from cover years. Most of the time, it signifies a death knell, for the firm and its stock.

“Once it looks like a penny stock, it trades like a penny stock,” he says.

Nasdaq eased its requirements after

“I can’t say that there is anything unaffected by this in terms of how you run your business.”

- Harry Mitchell, CFO, Sontra Medical Corp.

September 11, in the face of an overwhelming bear market that saw many companies fail to meet them. But in recent years, that trend appears to have reversed. A Nasdaq spokesman declines to comment on the listing standards, saying that the exchange does not talk

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about market conditions.

Over the years, a number of area companies have faced delisting, and the ramifications it entails; namely, loss of access to capital and alienating shareholders.

Reverse split Sontra Medical Corp. in Franklin completed a 1-for-10 reverse stock split in late August, a maneuver designed to stave off the threat of delisting. The move reduced the company’s float of shares from 27 million to 2.7 million, but jumped its share price to around $2.25.

By September the company had officially regained compliance with Nasdaq.

But since then, its stock has again fallen below $1.

The reverse split is the common, lastditch effort to cosmetically repair a share price, says Angel. “It’s basically a Hail Mary pass on the part of management,” he says.

CFO Harry Mitchell says Sontra wants to remain on the Nasdaq to increase its profile and access to brokers.

If Sontra were an OTC-traded stock, only specialized brokers could buy and sell it - something the company wanted to avoid.

The benefit of being a publicly traded

Worcester Business Journal • October 2, 2006

The minimum requirements for initial and continued listing on the Nasdaq exchange

Initial

Continued

Stockholders’ equity *

$5 mil.

$2.5 mil.

Market value*

$50 mil.

$35 mil.

Net income*

$750,000

$500,000

Publicly held shares (number)

$1 mil.

$500,000

Value of publicly held shares

$5 mil.

$1 mil.

* only one of these items is required Source: Nasdaq company is that it’s easy to raise capital through a stock sale, Mitchell says.

Becoming a penny stock changes all that, he says.

And while a split does in fact raise the share price, it opens a Pandora’s box of problems for the company, says Mitchell. Among the biggest woes: Infuriated shareholders who see it as a dilution of their stake and broadcasting a message that the company has fallen on hard times.

It spirals out of control when investors panic and sell the stock. With fewer

shares in float, divestment has a much larger effect on the price. And then short sellers increase their positions, speculating that the stock will decrease and the cycle continues.

Ethically and legally, a company cannot hype its stock with misleading press releases and overblown announcements to try and curtail the panic. The only thing to do, Mitchell says, is to focus on the longer-term health of the company and try and get it as well heeled as possible.

Mitchell says he is confident that the company “is moving in the right direction.”

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F E AT U R E ViryaNet mum In July, Nasdaq notified ViryaNet Ltd. in Southboro that its share price had also fallen below the $1 threshold and that it risked delisting if the price did not bounce back.

Within days, the company notified shareholders of its possible delisting but at press time had not announced what it plans to do to get back into compliance.

Its stock is trading around $1 currently and in late August it posted second quarter earnings of $408,000 - a reversal of the year-ago quarter when it lost nearly $1.3 million.

Still, it was ViryaNet’s second delisting warning within a year. Back in February, Nasdaq had notified ViryaNet that its market value, shareholder equity and yearly profits were all too low for a listed company (see related story, page 3).

In June, the company had regained compliance after meeting the shareholder equity requirement of $2.5 million.

But with another pending delisting, it’s an unknown horizon for ViryaNet, which makes workforce-management software and tools. Several spokesmen for the company declined to return repeated phone messages left seeking comment.

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Precision Optics moves to OTC Precision Optics Inc. in Gardner is one local example of how a reverse stock split is often not enough to prop up a company’s falling share price or meet requirements for Nasdaq.

“Once it looks like a penny stock, it trades like a penny stock.”

- James Angel, professor of finance, Georgetown University

Precision, which makes optical equipment for medical devices and other industries, moved to the OTC exchange on Dec. 27 after Nasdaq delisted it. It was the second time since 2002 that the company had faced delisting.

After the first notice, the company had made a 1-for-6 reverse stock split in

January 2003 as a way to keep its share price higher. It did, but only temporarily. Although it regained compliance with the rule, it again faced delisting in October 2004 after its shares fell below $1. At the end of 2005, it was officially sent down to the OTC. Its stock trades currently around $0.50.

Whether Nasdaq has started cracking down on small-cap companies is unclear. Spokesman Wayne Lee, declined to say whether the number of companies who face delisting has grown. But according to its electronic broadcasts, 50 companies nationwide face delisting because their stock price has fallen below $1. The exchange only began broadcasting that list of companies in August 2005.

Regardless of how commonly it occurs, the implications of delisting for small-cap companies are big, says Sontra’s Mitchell. “I can’t say there is anything unaffected by this in terms of how you run your business,” he says.

Kenneth J. St. Onge can be reached at kstonge@wbjournal.com

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October 2, 2006 • Worcester Business Journal

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