Updated: Aug 7, 2021
Having been the CFO of 4 publicly traded OTC Market issuers, I have been challenged to present those companies financial conditions not only in SEC required disclosures, but also to new investors. Many of those presentations proved challenging because of unrecognized bad funding and financing deals those companies made with a variety of less than desirable financing sources and service providers including convertible note (toxic death spiral) funders, equity line of credit funders (ELOC’s), 3(a)(10) funders and underperforming investor relations firms. Each of those funding’s focused solely in one issue – using the issuers stock to pay obligations created by these groups. For most of these issuers, the destruction of their capitalization tables and crashing stock prices preventing actual investment.
The above funding’s are not investments, actually quite far from any semblance of an investment. They are in reality short term loans mechanically designed to use the public market trading aspect of the issuers stock as repayment. Each of the above funding types bake in substantial discounts to the trading price when stock is required to be issued to pay back those funders. Usually several funders, all with steep built in discounts between 30% and 70% compete in the open market to sell their shares once received, all driving down the price of your company’s stock. The investor relations firms, besides bleeding the company for cash, are usually entitled to stock compensation as well, without any actual payment for those shares. No wonder NASDAQ and the NYSE won’t allow an OTC Market issuer to up-list to their exchanges that have continued to engage in these activities as these types of transactions open the company’s publicly trading stock to market manipulation. While those funding’s seem to serve a stopgap function, many companies end up in a quagmire of circular debt they cannot climb out of. Taking in $300K worth of these deals, spread out over 3-5 funders is hardly worth losing millions of dollars in market cap, shareholder value, and any ability to raise actual, non-immediate market-dilutive investment capital going forward.
I have examined almost every method to help OTC Market trading issuers and realized that there are only two solutions. The first is to find a white knight, a high net worth individual or existing shareholder willing to reach into their pocket and retire all of the types of funding’s above. Your company will still need to address your blown-out cap table though. However, by the time a CEO and its management team realize the deep hole they are in, it is very unlikely to find someone willing to do this. The second option is for the company to undertake a complete capital and debt restructuring. These are really the only two options. Fortunately, I have landed with a law firm that does just this. There are many “groups” claiming to do corporate restructurings for public companies, but they really don’t. My team member, Joey Chancis, a former CEO of an OTC Markets issuer, recently wrote an article on this that will help provide some insight into these scammers. You can view that article here.
A Comprehensive restructuring is, in all reality, the only option an OTC Markets management team has to straighten out the mess created by these funding groups. Is management partly at fault, maybe, but desperate times usually results in desperate short-term measures, and management teams are usually caught off-guard to extent of the damages these disguised funding’s cause longer-term.
A comprehensive restructuring can correct all of the company’s shortcoming. The programs designed by restructuring attorneys at this firm have only one goal – to correct balance sheet and capitalization deficits that will allow the company to present a more clean, fundable company to main-stream investors. It certainly is not an easy road to go down, and each restructuring plan is customized for a particular client’s needs and goals, but in the end, it’s the best way to show shareholders you are taking corrective action to stabilize, reshape and correct the anomalies in order to present the company to real investors, open opportunities to acquisition funding, expansion capital with an eye to moving to a national exchange.
Rick Iler is an Executive Finance and Restructuring Advisor at The Basile Law Firm, P.C. that focuses a large portion of the firms practice on restructuring public companies. While Mr. Iler is not an attorney, he works closely with attorneys assigned by the firm and the client’s management team to develop a restructuring plan specifically designed for the client. Rick is always available to discuss how a restructuring can help your company – as a former CFO of several public companies, he knows the stress and complexities of what you are going through. You can contact Rick at Rick@thebasilelawfirm.com for more information.