Hemp Inc (OTCMKTS:HEMPD) Moves Up After The Reverse Split

Last Friday Hemp Inc (OTCMKTS:HEMPD) issued a PR named “Hemp, Inc. Focuses on Environmental Clean-Up With Green Kenaf/Hemp Products”. Judging by the title most investors would have expected the PR to contain little more than fluff and for the most part they would have been right. In the last paragraph, however, the CEO of the company suddenly mentioned that a 1-for-10 reverse split has been implemented.

Such a decision, we reckon, is substantial enough to warrant its own official announcement but apparently HEMP decided that they couldn’t be bothered to do it leaving investors with no time to act prior to the split.

The reverse split had two immediate effects – it reduced the outstanding shares of the company from over 2.7 billion down to 270 million and at the same time bumped the price of the stock from 0.013 to 13 cents per share. It seems that for now the split hasn’t scared investors away and yesterday HEMP moved 14.3% up to a close at 16 cents. It should be noted though that the market showed little interest in the stock with the dollar volume for the day sitting at $122 thousand.

Inherently there is nothing bad about a reverse stock split. The problem is that HEMP’s stock has been forming one depressing chart pattern for quite a while and if the ticker once again starts to slide investors will be in real trouble. The massive red flags surrounding the company could very well lead to exactly that.

HEMP’s financial state has been deteriorating rapidly and according to the restated quarterly report at the end of March the company had:

• $632 thousand cash
• $2.3 million current assets
• $2.27 million current liabilities
• $6,223 revenue
• $1.08 million net loss

In order to generate even those minimal revenues HEMP actually incurred cost of goods sold of over $29 thousand.

The biggest problem, however, has been the dilution of the common stock. As we said earlier as of March 31 HEMP had 2.7 billion shares, number that was getting rather close to the 3 billion authorized. The company dealt with this situation by increasing its authorized amount to 5.5 billion common shares and that is why many investors may not have expected a reverse split to also be performed.

At least, according to the amended articles of incorporation filed with the Colorado Secretary of State, the reverse split changed the conversion ratio of the outstanding preferred and preferred K shares. Normally each preferred K share can be turned into 10 common shares but thanks to the split the approximately 150 million outstanding preferred K shares will be converted at 1:1 ratio. Investors should keep in mind that this change does not affect the preferred and preferred K shares that are going to be issued in the future. And with HEMP owing more than $2 million to its CEO millions of preferred K shares might see the light of day.

Meanwhile the decorticator line of equipment is still being assembled in HEMP’s facility in North Carolina. The latest update about their progress stated that Phase 1 has been completed but the wiring and the duct work are just starting.

If HEMP continues to issue shares at the same rate it has been doing for the past couple of years the stock could have a hard time maintaining its current price ranges. Any trades involving the ticker must be preceded by careful planning and extensive due diligence. 

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