Sonic Foundry Removes Key Overhang - Now, Market Can/Should Focus on Results
After market close Monday, Sonic Foundry (SOFO, $0.64)
announced a Board decision
to effect a one-for-ten reverse stock split of its common stock on
11/16/09. In our view, we believe the Board made the decisions for a
number of reasons, including:
- preemptive action to prevent
shares from being de-listed from the NASDAQ should the stock remain
below the $1.00 minimum bid price by the 12/21/09 deadline. Per our prior posts,
Sonic Foundry has shown considerable progress over the past year, yet
the Market has not noticed. Thus, even if Sonic Foundry meets FY09 (end
September) guidance for >20% revenue growth and cash profitability,
the stock may well remain stuck below the $1.00 requirement and face
de-listing. We think the Board wants to eliminate this negative risk
(although de-listing isn't necessarily the end of the world as we have
seen some OTC companies thrive and ultimately re-list over the past
decade).
- remove overhang associated with #1 that keeps some investors out of the stock.
- remove negative stigma associated with trading below $1.00, from both an investor and a business (customer) perspective.
- establish
new trading price in mid- to high single digits ($6-7 based on current
levels) that is above $5 minimum requirement for some investment funds.
- potentially
reduce the large absolute number of shareholders who hold fewer than
ten shares by not allowing fractional shares to be issued to such
holders (*per 10-K, at 12/3/08, Sonic Foundry had approximately 9,000
shareholders, an exceptional number for such a small company that
increases public company expense).
- improve perceived earnings per share
power (although market capitalization will be unchanged) -- by taking
fully diluted shares from approximately 43 million (including all
options) to 4.3 million, Sonic Foundry could report earnings of $1.00
per share IF net income is $4.3 million (looking out). Depending upon
Mr. Market's appetite for high growth, niche technology companies, a
forward multiple of 20-30 times this figure would imply a share price
of $20-30.
The above reasons appear sensible and are not
all-inclusive. One potential negative is that an already illiquid stock
could become less liquid with a free float that will be 10 times
smaller than current levels.
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