Energy Focus (NASDAQ: EFOI) stock should rise 700% at the open today. This is a purely nominal price move, one that doesn't even imply an increase in the value of either the company or any holding in it. The real price change today in EFOI will be by whatever amount the stock price changes other than that seven times. As ever we need to be careful about changes in nominal prices and changes in real prices - given that this is purely nominal it's something we can ignore as long as we don't get excited by the idea of that price change.
The problem is that Energy Focus hasn't been doing well. EFOI stock is down 83% on the past 12 months and some 97% over the past 5 years. This isn't what investors tend to hope for of course but there we are, not every plan works out. What makes this a little more bitter here is that Energy Focus works on energy efficient lighting systems. Given what else is going on in the world we'd sorta hope that someone in that business would be able to ride the wave of increased energy efficiency. But, you know, it appears not. The most recent accounts show that they've a turnover of some $1 million (approx.) a quarter and lose some $1 million a quarter. Effectively, and roughly, cost of sales is about the same as revenues and all the costs of having the firm - overheads, R&D etc - are losses. There are also concerns over being able to continue as a going concern. These are not things that improve a stock price.
Energy Focus stock price from NASDAQ
The problem here is that this runs smack into a cultural insistence on the US markets. Penny stocks are seen as somewhat disreputable. So much so that a stock that trades below $1 for long enough will lose its position on either NASDAQ or the NYSE. Given that those are the two markets that offer liquidity and capital raising opportunities it's not a good idea to lose such a listing.
So, a substantial period below that $1 minimum bid price does mean that something must be done. In the absence of management being able to turn the business around and start making good profits that has to be a nominal trick, not a real price change. That trick is the reverse stock split. Simply declare that what used to be 7 pieces of stock are now one. The market capitalization of Energy Focus does not change, but the number of pieces of stock that make it up drop from ~19.2M shares to ~2.7M shares. The result of such a 7 for 1 reverse stock split is that the value of each share rises by 700%, or seven times.
And so is that NASDAQ problem solved - even if it is purely a nominal price change that we don't have to pay much attention to once we note that it has actually happened.
