NASDAQ gives smaller firms a break

The selloff in September and October slashed share prices of companies big and small. And the damage done particularly to smaller companies has prompted the NASDAQ exchange to temporarily suspend one of its "continued-listing'' standards.

The move gives several Minnesota public companies time to resuscitate their flagging stock prices. And that's a good thing. Twelve companies from the Star Tribune 100 ranking of the largest Minnesota-based firms by revenue are trading at under $1. Five of those have been delisted. But the temporary suspension has bought other companies more time to get back in compliance with the minimum bid listing requirement.

Granite City Food & Brewery, which operates casual dining restaurants, received a warning letter from NASDAQ saying that it could be delisted because it's in noncompliance with the $1 per share minimum-bid requirement for continued listing.

A company may receive a delisting notice from NASDAQ if its stock trades below $1 for 30 consecutive days, or if it fails to meet other requirements. NASDAQ has handed out dozens of similar notices to public companies and was poised to issue more when the exchange decided to suspend enforcement of the minimum bid provision until Jan. 16.

The consequences of delisting are significant because it reduces a company's access to capital, credit ratings may be downgraded and it may become harder to buy and sell shares. Analysts may drop coverage of delisted firms. Also, some money managers may be required to sell shares if they fall below certain thresholds; others may not be allowed to invest in companies that are not listed on a major exchange.

"Once you go under $10 per share, some mutual funds won't own a stock, and once it goes under $5, more funds won't buy it, and once it goes under $1 there are even fewer interested," said Clint Morrison, research director at Feltl & Co., which makes a market in several dozen small companies. "It's ironic, because as the price goes down on some good companies ... they get cheaper to own but there are fewer buyers. And at times like these, some people, if they invest at all, it might be in 3M or GE, not some 50-cent stock."

Down markets conspire most against small companies that have debt. Any revenue declines tend to magnify earnings dropoffs. And they are perceived as the most volatile to own and the hardest to sell. Down markets temper bold investors even in companies that are doing well.

For example, Compellent, a fast-growing data storage firm, has seen its stock price drop by more than 50 percent, to about $11 per share in recent quarters, even though its performance is holding up.

"The growth and fundamentals haven't changed," said Chad Bennet, research director at Northland Securities. "It's knocking the ball out of the park. Wall Street is not giving it any benefit for what it has accomplished in 16 months as a public company."

Another prosperous small company, Datalink, in a similar business, has slipped below $4 per share, or total market value of about $35 million. Yet the company is profitable, has $25 million in cash on its balance sheet and is growing.

"You could just about buy this company with its own cash," Morrison said. "And it's profitable and growing. But the market wants companies with a lot of liquidity, stocks you can get in and out of quickly."

Rather than fight to be relisted, some companies may decide that the time and expense associated with a public listing are no longer worthwhile. Delphax Technologies, a Bloomington-based maker of digital print-production systems, was delisted from NASDAQ in May and has since been trading over-the-counter. Delphax has annual revenue of more than $40 million and as recently as two years ago the company's stock traded at more than $2 per share on the NASDAQ.

Last week, Delphax announced plans to deregister its common stock. In a release, CEO Dieter Schilling cited cost and coverage as the principle reasons.

"The burden placed on the company, given its size, for maintaining its registered status is considerable. ... Considering the lack of analyst coverage and the thinly traded nature of our stock, the board of directors believes that the company and its shareholders are not receiving a meaningful benefit from the necessary investment of time and money in maintaining public reporting compliance."

Staff writer Neal St. Anthony contributed to this report.