Exela Technologies (NASDAQ:XELA) made headlines on April 11 when it decided to cancel scheduled voting on a reverse stock split. The choice was made after the firm decided that “continued listing on Nasdaq is important for [its] shareholders, employees and customers.” In turn, XELA stock fell almost 10% the next three trading sessions.
Just a week later, though, Exela subsequently announced a very generous buyback offer for investors that bumped shares back up 13% over the next two days. However, XELA stock is now surrendering those gains.
With all of that in mind, I think the company’s decision to cancel the reverse stock split vote was a very wrong and dangerous decision, and here’s why.
XELA stock suffered quite the decline in the back half of 2021. And on Dec. 27, XELA stock closed at $1 per share and has not reached the mark since.
That said, the Nasdaq has a minimum bid price requirement for shares — a threshold that is exactly $1 per share. The bad news for the firm is that it received a notice letter of delisting from the Nasdaq on Feb. 8. Thus, the clock is ticking for Exela and XELA stock, as it has an initial period of 180 calendar days — until Aug. 8, 2022 — to regain compliance with listing requirements.
To gain compliance with the listing requirements of Nasdaq the closing bid price of Exela’s common stock should be at least $1.00 for a minimum of 10 consecutive business days until Aug.8. And an additional 180 calendar day compliance period may be granted if this requirement is not met.
Therefore, without a reverse stock split, I believe that Exela Technologies is playing with fire. A reverse stock split is useful when the delisting danger is imminent. The move can help boost the stock price and potentially gain more attention from analysts and institutional investors.
That said, Exela Technologies has severe risks to face. Why? It has less than one year of cash runway, negative shareholder’s equity and a massive stock dilution as shareholders have been substantially diluted in the past year, with total shares outstanding growing by 717.6%.
On top of that, it has a poor sales growth and is unprofitable.
In general, a reverse stock split is not perceived to be good news by market participants. However, I see no other option now to avoid the risk of being delisted. Tough decisions must be made in business frequently, but Exela Technologies should make this one now. This is, of course, unless it believes it will become a meme stock and its stock will pop up, which is unlikely to lead to a sustainable stock price above $1 given its fundamentals.
Overall, the stock is not a buy to me and I do think management should consider at least a 1-for-10 reverse split to send the stock price above $3 per share and reduce the number of existing shares 10 times accordingly. However, I am not in charge here.
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On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.