Why would a company do a huge reverse stock split and then immediately revert it?

Question

I noticed something strange in a corporate events data feed and decided to look deeper. A stock with ticker PMD completed a 1-for-5000 reverse stock split yesterday, followed by a 5000-for-1 stock split one minute later. The company does drug testing using hair and has been publicly traded since the 1980s. Information is very limited, and I could only find this Monday press release: https://www.globenewswire.com/news-release/2024/12/02/2989790/0/en/Psychemedics-Corporation-Announces-Reverse-and-Forward-Stock-Split.html.

Anyone with fewer than 5000 shares gets $2.35 per share cash, and everyone else keeps the same number of shares they had before the reverse split. Their stock price is not low enough to be in danger of delisting, but for some reason, doing this will let them "deregister" and save $845,000 annually.

What exactly is their strategy with this strange move?

My best guess is that they wanted to purge enough small shareholders to the point where the number remaining was below a certain threshold so that securities laws no longer applied to them, and 5000 was the number that would do it. But they don't give their reasons in the press release.

Answer 1

The 14A linked by @KelvinSherlock has your answer, particularly bullet 4 on the second page (emphasis is mine):

If the Transaction Proposals are approved, we will file with the Secretary of State of the State of Delaware certificates of amendment to our amended and restated certificate of incorporation to effectuate the Reverse Stock Split, at which time (the “effective time”) each share of our common stock held by a stockholder of record owning immediately prior to the effective time fewer than the minimum number of shares, which, depending on the Stock Split ratios chosen by the Board, would be between 4,000 and 6,000 shares (the “Minimum Number”) would be converted into the right to receive $2.35 in cash, without interest (the “Cash Payment”), and such stockholders would no longer be our stockholders.

and

The Forward Stock Split, which would immediately follow the Reverse Stock Split, would reconvert whole shares and fractional share interests held by the Continuing Stockholders back into the same number of shares of our common stock held by such Continuing Stockholders immediately prior to the effective time. As a result of the Forward Stock Split, the total number of shares of our common stock held by a Continuing Stockholder would not change as a result of the Stock Split.

and

The Stock Split and the transactions contemplated by the Stock Purchase Agreement are being undertaken as part of our plan to terminate the registration of (or “deregister”) our common stock under Section 12(g) of the Securities Exchange Act of 1934, as amended, and suspend our duty to file periodic reports and other information with the Securities and Exchange Commission (the “SEC”) under Section 13(a) thereunder, and to delist our common stock from The Nasdaq Stock Market

and

The primary purpose of the Stock Split is to enable us to maintain the number of record holders of our common stock below 300, which is the level at which SEC public reporting is required

TLDR: The reverse stock split results in anyone with less than ~5,000 shares to end up with less than 1 share. Anyone with less than 1 share then receives cash in exchange for their stock (look up cash in lieu (CIL) or this question). Then, a stock split is performed (at the inverse of the reverse stock split ratio) which results in those shareholders remaining to have the same number of shares as before the reverse split. This effectively reduces the number of shareholders to less than 300, which allows them to go private.

Answer 2

My best guess is that they wanted to purge enough small shareholders to the point where the number remaining was below a certain threshold so that securities laws no longer applied to them, and 5000 was the number that would do it.

That is the answer. They wanted to go private. So they enacted a plan that would do it. Others have done it.