Small World Kids Inc., which made its name developing toys based on children’s literary works, should have seen a nice bump in its stock price after announcing June 22 that it had licensed the venerable Dr. Suess name for a line of infant, toddler and preschooler toys.
But microcap investors apparently weren’t as interested in green eggs and ham.
Small World, whose shares on the Over-the-Counter Bulletin Board have swung between 60 cents and $6.10 over the past 52 weeks, stubbornly treaded water at the same $1.30 a share it had closed at three days before the announcement.
Since then they’ve dropped to $1.25, where they remained as of July 12, lowering the Culver City toymaker’s market capitalization to $6 million from just over $26 million a year ago.
“It’s a dangerous and precarious world out there for microcap public companies,” said attorney Lance Kimmel, whose Los Angeles-based SEC Law Firm specializes in advising small companies on corporate and securities law.
Welcome to life on the fringes of the public markets.
According to the Business Journal’s list of the 200 largest public companies in L.A. County, at least three other companies at the bottom of the list have seen similar precipitous declines in capitalization. And the reasons often are not much of a surprise.
Small companies with less access to capital than larger companies are often attracted to the public markets, but then find it far tougher going than they imagined.
They can be overly confident of their ability to handle shareholder demands and regulatory requirements, especially in this era of stricter accountability. Companies can easily spend hundreds of thousands of dollars each year to comply with Securities and Exchange Commission rules, even for an issue traded over the counter.
Consider Advanced Biotherapy Inc., whose market cap dropped to $2 million from $14 million over the past year. It said in its most recent quarterly reports that it was considering delaying or discontinuing its required regulatory filings.
The Woodland Hills-based biotech has been working for years to develop antibody-based treatments for certain autoimmune diseases. Its lead drug candidate to treat skin diseases is in early-stage clinical trials with any commercial launch several years away.
As a result, Advanced Biotherapy is just hanging on, with its over-the-counter stock trading at 4.3 cents as of July 12. In its most recent quarterly report, the company said that as of March 31 it had accumulated debt of $13.8 million, needed at least $6.4 million in cash to conduct full operations and make debt payments for the next 12 months, but had only $9,264 cash and investments on hand.
A special committee of its directors is exploring options that include a joint venture or other partnership with a larger pharmaceutical company, a private equity infusion, or putting itself up for sale. “The amount of net losses and the time required to reach sustained profitability are highly uncertain,” the company noted in its regulatory filing.
Examples abound
Another tech company, Beverly Hills-based Universal Detection Technology saw its market cap drop to $1.7 million from $8 million over the past year even as demand for its homeland security-friendly products should have been picking up.
The company, which develops early-warning systems for detection of dangerous airborne biological and chemical agents, is trading at just 3.4 cents a share over the counter. Universal reported a working capital deficit of $3.2 million as of the end of March and owed its chief executive $678,161 of accrued but unpaid salary. Its auditor has expressed “substantial doubt as to our ability to continue as a going concern,” the company recently reported.
Even so, CEO Jacques Tizabi has been upbeat about his company’s prospects, detailing several moves in recent weeks to improve marketing and distribution of its bio-terrorism detection technology, including several partnerships and a new consulting division.
“While anthrax may not be in the news every day, the threat of bioterrorism is real, and not going away anytime soon,” he said in a recent letter to shareholders.
Kimmel notes that many small companies get into trouble because their public float is relatively small and closely held by a small number of investors, which makes stock extremely volatile if anyone decides to cash out.
That was a pitfall for Small World, with its relatively small number of outstanding shares. The company last October conducted 1-10 reverse split of its common stock, in anticipation of major acquisition. But the deal fell through and the reverse split reduced the number of outstanding shares to 5.4 million from 87 million. Moreover, the shares were held by about 60 stockholders of record who don’t trade very often.
Chief Executive Debra Fine acknowledged the severe lack of liquidity was a reason the Dr. Suess news didn’t generate much movement in the stock. Shares traded at $6 a few days after the reverse split. But the price eventually began to drift downward, accelerated in February by news that the acquisition of a crafts company had fallen through.
Still, Small World has been able to attract capital by other means from nearly a dozen private equity firms, family trusts and high-net worth individuals. A few weeks before the Seuss announcement, the company announced the private placement of $2.5 million worth of Class A-1 preferred stock at $1.10 per share. Small World also restructured $3 million of debt into the same class of preferred stock. The private placements are in the process of being registered so they eventually can be traded.
“At the end of the year it was a very tough market, so we decided this approach made a lot of sense for us,” said Fine.
