The good news is that the R/S doesn't change the value of your equity...at first.
Example...
You own 1 million shares today.
1,000,000 x .0001 = $100
Say they do a 50 to 1 R/S. (divide your shares by 50, multiply the share price by 50)
20,000 x .0050 = $100
Your equity value remains the same.
However...now the bad news, and the reason most stocks tank on the announcement of a R/S.
The lowest price the stock could trade before the R/S, was .0001. If the company begins diluting the market again with shares after the R/S (which most of them do), the price can drop from the initial post R/S of .0050 to .0001 again. Look at the math if that happens.
20,000 x .0001 = $2
Because of this R/S and dilution, R/S and dilution cycle that some of these pink companies do, there are examples out there of investors who have had $10,000 become worth a penny over a few years.
This cycle is usually the result of what they call Death Spiral Financing, used by many of these pinks as the only way to finance their operations. A private lender has convertible preferred stock as the collateral for the note...but the company doesn't have profits to pay off the note, so the lender will short the stock and then convert the preferred, which causes dilution of the common. They pay back the borrowed shorted stock with much cheaper shares. Also, the note agreement stipulates that the company must maintain a minimum share value. The only way to do that, is to R/S. Wash, rinse, repeat. The note holder always gets his money...the shareholders get the shaft.
During everyone of these R/S - Dilution cycles, there are a group of shareholders that get burned, and a new group that hopes this cycle is the period where some new product/revenue breakthrough occurs, giving the company revenue to finally pay off the note, stop the cycle, and have the stock price finally appreciate.
GLTA
