NeuroBo Pharmaceuticals (NRBO) Stock Soared After A Stock Split

Key takeaways

• NeuroBo Pharmaceuticals (NRBO) stock soared Tuesday after initiating a 1-for-30 reverse stock split Monday night
• The company still holds 100 million authorized shares, while the number of outstanding shares plunged from 26.7 million to around 900,000
• The reverse stock split was intended to jack NRBO’s stock price high enough to avoid being delisted on the Nasdaq exchange
• However, the move may not be enough to save NRBO from insolvency next year

Monday morning, NeuroBo Pharmaceuticals – a clinical-stage biotech company – made an unusual announcement. That evening after market close, the company’s shares would undergo a 1-for-30 reverse stock split. Starting Tuesday morning, all of NeuroBo’s Nasdaq-listed shares would trade on a split-adjusted basis.

The move wasn’t entirely unprecedented. Back in June, the company’s stockholders approved a proposal to reverse-split shares anywhere on a 1-for-5 to 1-for-35 ratio, as the board of directors deemed appropriate.

What is unusual is the short time window between the official announcement and the split itself; only a matter of hours. That didn’t leave much time for markets to stomach the change – though it also didn’t stop markets from responding. By Tuesday morning, NRBO stock tripled in price after having doubled the day before on a pre-split basis.

But the split still leaves several questions.

Why did NRBO stock reverse split?

What does a reverse split mean for investors?

Will it save the research and development-heavy firm from insolvency early next year?

Let’s take a look.

NRBO’s reverse stock split

NeuroBo first announced the official stock split before Monday’s opening bell. By the closing bell, its share price had doubled to almost 56 cents (a little under $16.70 on a split-adjusted basis).

NRBO stock gave up some of these gains in Tuesday’s premarket, post-split trading session. When the stock market officially opened Tuesday, NRBO soared high and fast, more than tripling to $52.84 in mid-morning. The sudden surge prompted market makers to temporarily halt trading several times.

Tuesday afternoon saw NRBO finish at $29.90 per share having gained about 70% on a post-split basis. Following its reverse stock split, NRBO has gained over 2,131% YTD.

These potentially short-lived gains are a small part of why NeuroBo’s directors split its stock in the first place.

As a firm that quite recently traded for as little as 25 cents, NRBO was in danger of being delisted from the Nasdaq. (Neither Nasdaq nor the NYSE list stocks that trade under $1 for extended periods.) Rather than continue violating listing requirements, NeuroBo consolidated its stock to artificially boost prices and exit the danger zone.

Unfortunately, the trouble doesn’t end there for NeuroBo.

In its most recent quarterly filing, NeuroBo reported that it carries a fiscal deficit of $88 million as of 30 June. Beyond that, the firm holds just enough cash to see through Q1 2023, after which it will require substantial funding until it can generate the revenue needed to become self-sufficient.

And as a biotech firm exploring solutions to rare or expensive diseases, NeuroBo needs a lot of funding. Without a cash infusion – from stock or debt issuances or product releases – NRBO faces potential insolvency as soon as next year. Likely, NeuroBo’s management hopes its reverse stock split will help it change course.

What is a reverse stock split?

Effectively, a reverse stock split allows public companies to lower the number of shares outstanding while increasing per-share prices.

To do so, a reverse stock split divides the number of outstanding shares by a set value. Then, the price is multiplied by the same value. (For a more concrete example, think of it like trading in five $20 bills for one $100 bill. You have fewer pieces of paper, but the each piece you do have carries more value.)

In NeuroBo’s case, the number of outstanding shares was divided by 30, creating a 1-for-30 split. This lowered its total number of outstanding shares from 26.7 million to roughly 900,000 while increasing the price 30x.

Reverse stock splits vs. regular stock splits

Reverse stock splits often occur in smaller companies that need to boost capital, restructure or entice incoming investors. But you may be more familiar with their counterpart: forward stock splits.

A reverse stock split divides the number of outstanding shares by a set integer while multiplying the per-share price by the same integer. This results in fewer, but more valuable, shares.

By contrast, a regular stock split multiplies the number of outstanding shares by a set integer and divides the per-share price by the same integer. This results in more, but less valuable, shares.

For example, when Alphabet (Google) issued its 20-for-1 split this year, each share of stock was split into twenty shares, each worth one-twentieth the price. At the same time, Google ended up with twenty times as many shares floating around.

Though they complete inverse goals, both kinds of stock splits share similarities. For one, the company’s market cap remains the same, as does the value of each investor’s holdings. What does change is how many shares each stockholder owns, as well as the value of each share. (While news of stock splits can introduce volatility, affecting per-share values, the split itself isn’t responsible.)

Why would a company reverse-split their stock?

Companies tend to reverse split their stocks for a small handful of reasons, often preceded by not-very-cheerful news.

Take NRBO, which split largely to avoid being delisted from Nasdaq. Theirs isn’t an unusual story: when a company’s stock regularly trades under $1 per share, the company can issue a reverse split to bump the price. This keeps them on national exchanges and off the pink sheets, which can introduce liquidity and trust issues into an investor base.

The artificial price hikes borne from reverse splits may provide other benefits, too. Some investors may view higher-priced shares of the same company as more valuable, while investment firms with price minimums are more likely to buy higher-priced stocks.

Companies may also consolidate their stocks if they want to make it easy (or less financially disastrous) to go private or float a spinoff company.

Are reverse stock splits good or bad?

Just as a regular stock split isn’t necessarily good news, a reverse stock split doesn’t guarantee bad news. That said, the circumstances surrounding reverse stock splits tend to be ill-favored by investors.

Often, companies don’t contemplate a reverse split unless they need to boost stock prices, which can be a sign of looming financial troubles. In some cases, the mere specter of a reverse split is enough for investors to bid down the price, counter to the purpose. Decreased liquidity can also impact investor perception and behavior as fewer shares float around for trading.

But that’s not always the case. For example, travel giant Priceline initiated a 1-for-6 stock split following the dot-com bubble burst. The company took the opportunity to regroup, and since bottoming in late 2000, Priceline’s stock has soared over 17,550%.

Another successful reverse split story is CitigroupC
, which completed a 1-for-10 reverse stock split after recovering from the Great Recession. Though its price has bounced about a bit, it’s never again neared its pre-split $4-per-share valuation.

Both examples share a commonality: the firms used their reverse stock split as one tool in an overarching plan to overhaul the business and improve long-term cash flow.

Unfortunately, many companies that reverse split are unable or unwilling to commit the time and capital needed to improve, making Priceline and Citigroup relative outliers.

And in NRBO’s case, it’s possible the reverse stock split is simply precursor to a springtime death knell.

How does the NRBO reverse stock split affect investors?

Stocks aside for a moment, NeuroBo is a biotech firm that researches therapies for often expensive neurodegenerative and cardiometabolic diseases. As a small-scale clinical-stage firm, NeuroBo requires tons of funding – and like many of its ilk, few of its products make it to market.

That means the company’s ability to raise stock capital is crucial to its survival. Before Tuesday, the company’s status as a penny stock (stocks that routinely trade below $5) hampered its ability to raise money while risking delisting from the Nasdaq.

On that end, NRBO’s move might spell some relief for the company. With shares trading higher and its name in the media, the spectacle of a reverse stock split has raised awareness and may beckon new investors.

On the other hand, NRBO remains a highly speculative investment due to its size and financial troubles. (After all, it was a penny stock just yesterday.) Chances are, volatility will remain the name of NeuroBo’s game for a few days yet.

Fortunately, the NRBO stock split won’t impact investors where it hurts: their taxes. Because stock splits don’t change the value of an investor’s holdings, just the price per parcel, there’s no need to fret about capital gains taxes. (Rarely, a stock split can produce a tax bill, but generally only when the company issues cash instead of fractional shares due to an uneven split in an investor’s holdings.)

On a broader scale, NRBO is a small firm on shaky financial ground. For investors who don’t hold the stock, it’s possible that NRBO’s reverse stock split never impacts you at all. And on the chance that they weather this storm and make a miracle breakthrough, prospective investors will likely receive word long before its value soars again.

Don’t chase penny stocks for cheap thrills

Despite the odd success story, reverse stock splits rarely pan out the way the issuing company hopes. In NRBO’s case, there’s some evidence the company may be stumbling through its last days, unless it sees a hefty infusion of cash. Still, while there’s no guarantee NRBO will come through, there’s no guarantee it won’t.

All investors can do is wait and watch.

On a broader scale, investing in penny stocks (or former penny stocks) like NRBO is a risky endeavor fraught with fraud and losses. But you don’t have to chase cheap thrills to enjoy the thrills of the stock market – Q.ai has all the excitement you need.

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