A fair question. Let me present the bull's case.
With 5 billion outstanding shares, the company has a market cap of $500,000. Let's work with the idea that we want to value this company with a price/sales ratio.
(Price/earnings ratios are deceptive -- if this company is to grow, we want it to be pouring all the money it can into marketing, research and development; hence there are contexts in which, given everything else in the financials, low earnings aren't a bad thing. However, sales are always the bottom line, hence the focus on price/sales ratios.)
Now price/sales ratios can vary greatly. 1 is a pretty conservative price/sales ratio, though it depends on the sector. If this company were really growing fast, a price/sales ratio of 2 might be ok -- in fact, even that might be conservative. Now, my understanding is that sales for the last couple of years have been about $1.3 million. Potentially, that could justify a market cap of $2.6 million, or a price per share of about 0.0005. That would be a nice profit for some.
If that were the end of the story, I'd say that the stock deserves to trade higher than it's trading now. The problem, of course, is that there's a bears' story too. The outstanding shares could very well increase quite quickly. With the present price, selling a billion shares gets them $100,000, which doesn't really last long. So it's conceivable that they could need to sell several billion shares, maybe even in the next handful of months, in order to stay afloat. (Don't forget also that Jim Holmes needs his yachts!) The problem with that, from their perspective, is that if they want to retain ownership of the company, they'll need more authorized shares. Thus, dilution begets more dilution, and the calculation just made in the bull's case becomes less and less relevant. So a bear would value the company pretty much where it is now (and in fact, if the price could go lower, they'd value it lower -- the problem with a reverse split being precisely that it allows the price to go lower.)
Obviously right now people are buying the bears' case, and probably with good reason. But if the company really started ramping up its sales, and showed a commitment to minimizing dilution (perhaps, amongst other things, by firing Holmes), the bulls' case could become more persuasive. Right now, I would say that the chances of that are pretty slim, but who knows.
AI
