Ra Medical Services (#RMED) announced on September 12, 2022, that it had entered into a reverse merger agreement with privately held Catheter Precision. RMs are relatively uncommon historically, but have increased in popularity in recent years. In 2021, a record of well over 400 RMs were announced (and either pending or closed at year’s end).
Details of reverse mergers are often murky, confusing and (perhaps) even misleading to retail traders. Given that these events are necessitated by struggling public companies, the tickers involved are typically low penny stocks followed by traders in this high-risk, high-reward sector.
No two RMs are exactly alike, but looking at historical examples of how RMs played out following their announcement to the point of completion and beyond is helpful.
The Histogenics Reverse Merger with Ocugen 
Histogenics (formerly #HSGX) completed a reverse merger with Ocugen (#OCGN) on September 27, 2019, and the new #OCGN ticker went live on September 30th. This reverse merger was announced in April 2019, following news a few months earlier that Histogenics was looking at capital restructuring alternatives.
On April 5, 2019, Histogenics announced the reverse merger after market hours. The opening price that day was $.105 (prior to subsequent reverse-split adjustments). The high price in the regular session on Monday, April 8, 2019, was $.29. Those prices marked the trading range for HSGX stock that remained intact all the way through completion of the reverse merger. There were a few compelling swings during that early-April through late-September time period, but the stock held steady around $.17-$.23 for much of the time.
At the time of the RM announcement, it was indicated that existing HSGX shareholders would retain 10-percent ownership in the newly-formed company (the RMED announcement indicated a 20% ownership retention). This percentage increased slightly by the time of the RM completion.
The HSGX – OCGN reverse merger was enacted with a 1-for-60 reverse split. At the time of completion, the Histogenics share price was $.1620. The RS price became $9.72. The high water mark on September 30th for OCGN was $8.62, and its closing price was $2.85. Early OCGN investors (and those who held through the RM) remember all too well the dramatic cliff-drop that culminated in a $.235 low share price on November 26, 2019.
What Happened to Ocugen Post-RM
Though swings were limited in the pre-RM months for HSGX, there was a wild swing on the last two days of HSGX trade, which saw a high of $.28 before a sharp drop to a low of $.15 and the $.1620 closing price.
The post-RM period is where the legendary tale of Ocugen really gained legs, though. In various disclosures leading up to the reverse merger, details were provided about multiple series of warrants issued to private investors in OCGN. Additionally, there were mentions of post-RM share price events that would trigger the availability of additional warrants. However, the details were extremely confusing to the typical retail trader (and even the atypical trader) and seemingly far more convoluted than necessary if the intent was to promote market understanding.
As a result of the structure of the event-driven warrant triggers, private investors would effectively garner millions of additional shares as compensation for a low share price following the reverse merger. Not surprisingly, the share price immediately came under pressure (through short trading and panic selling), and all of the thresholds to trigger the additional warrants were met.
Only in the aftermath of the initial nosedive in the share price (and some discount buying) did the company start to disseminate more details on the potential implications to the outstanding share count antcipated as a result of warrant exercises. The net result was an initial OS around 10 million shares ballooned to more than 60 million within a few months. Established rules on warrant execution led to gradual execution for weeks, and the constant dilution combined with heavy shorting led to a share price that remained in the $.235 – .9588 range from November 2019 through December 2020, when new of Ocugen’s involvement with Covaxin came to light. The subsequent news cycle led to an OCGN all-time high of $18.77 on February 8, 2020.
Applying OCGN Lessons to RMED 
As mentioned, no two RMs are exactly alike in terms of how they play out before, during and after RM completion. However, the lessons learned from the HSGX – OCGN reverse merger can help RMED holders develop an effective trading strategy in the coming months.
The following are some key parallels and things to keep in mind:
- Announcement share price. As noted, the share price in OCGN ranged from $.105-.29 around its RM announcement. RMED closed at $.15 on Friday, September 9, 2022, and traded just over $.22 on Monday, September 12th, following its RM announcement. Resistance at a medium-term gap opening likely restricted further movement despite over 50 million shares traded.
- Post-RM ownership ratio. The 20/80 (RMED holders / private investors and insiders) ownership ratio announced for RMED is higher than the OCGN ratio. This ratio will likely change somewhat before RM completion, but it suggests a slight advantage for RMED holders with the new public company. Still, private investors will have overwhelming majority control of post-RM shares and, therefore, what happens to the share price afterward.
- Read the fine print. Much like the OCGN announcement, the RMED announcement contained a lot of provisions and numbers. Forming any sort of opinion on the implications to the pre-RM and post-RM share price with the details provided is challenging (if not impossible) at this point. Over the next several weeks leading up to the anticipated late-2022 RM completion, more details and adjustments to RM terms will be disclosed. Traders need to pour over the fine print and pay attention to any items related to share conversion rates, warrants/options and other matters related to post-RM activities that could influence post-RM share price.
- Ride the waves. Any news related to the RM, combined with market uncertainty and speculation, may lead to at least a few wild swings in pre-RM share price. Savvy traders may have an opportunity to get in on a few 2x-3x or more swing plays. As the potential close gets near, volume and volatility will escalate.
- Hold at your own risk. Existing stockholders have to decide leading up to the RM whether to hold through or sell ahead of the event. The conversative play is to find a decent exit price in the days or weeks ahead of the event and wait to see what happens. Aggressive traders who anticipate a post-RM bounce prefer to hold. Of course, in the Ocugen case, those who held had limited opportunity to get out early and minimize the damage.
- Expect the unexpected. When a reverse merger closing date is first announced, there are no guarantees of completion on that date (or at all). I believe the RMED reverse merger will close, but delays (to meet shareholder voting requirements or for other reasons) are common. Announcements of delays often don’t come until the day before or day of expected completion, which means volatility. On the case of Ocugen, its reverse merge was delayed from September 12, 2019 to September 27th.
Conclusions
Reverse mergers present high-risk trading scenarios, but some traders love the volatility before and after completion. Because RMs are facilitated by a public company that is restructuring due to significant business problems, a lot of activity involves finance structuring. The details and implications of instruments like warrants are difficult to project ahead of the RM.
If you are going to trade #RMED heading up to its (anticipated) reverse merger, or after completion, consider your tolerance for risk and volatility. There are certainly compelling swing opportunities on both sides. However, the established market is not in the driver’s seat. It is the private investors that dictate what happens, and the choices that make are primarily influenced by which strategies maximize their profit potential. And, as retail traders should know, hedge funds and institutions make money trading counter to the retail sector.
