Although I agree with beta - there is another option. Don't throw good money after bad, wait to see what the market will do with the stock. If it moves up (on good news) even say to .50 or .60 AND it appears that the company will survive - you could average down as the PPS moves up.
Everyone wants to "call" a bottom - it's foolish to even try. For a stock to reach a new high it MUST go through it's current price on momentum and bullish sentiment. Trying to make a few extra pennies on a down-trend is like a dog chasing its tail - it's always better to wait and get in on the upswing.
That is a good question. If your current cost basis is several orders of magnitude higher than the current value, the so-called benefit of averaging down is negligible IMO. For example, bringing down the cost basis from $2 to $1.60 is really not that significant when the stock is trading at 0.35. Better to just hope for breaking even in the future or sell when the money is needed. But if it is $1 currently and you can bring it down to 50-60 cents without sacrificing too much, then I think you can break even in the near future and then reduce your position to your original stake (in absolute dollar terms or number of shares) and diversify the rest. Just my thoughts...
In general I think averaging down to lower your cost basis is more about getting a psychological boost than sound strategy. Every buy or sell decision should be made soley based on whether you think the stock is undervalued or if you are a trader it should be bought if you think the technicals favor the stock rising. Your first 10,000 shares bought has zero relevance to whether the next 10,000 shares are cheap or expensive. They should be seen as independent events for everything except portfolio weighting.