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Restructuring: Re-Boot towards Building a Microcap Company

A few weeks ago, a CEO of a microcap company was relaying a story to me. He had retained a full service investor relations firm to help with investor communications and put together a road show in New York City’s financial district. He was brimming with confidence about his prospects.


Over the past few years, he has grown his company from the ground up into a revenue-producing machine. His company was expanding but not at the pace he had hoped due to a lack of capital. By obtaining serious money, he could step up production and meet the demand for his company’s products.


However, an odd thing happened in New York… No one was interested. He did not obtain a nickel in new financing.


While he had a great business model and showed significant growth, there were two items that burst the balloon:


Prospective Funder: “How much convertible debt do you have?

CEO: “Approximately $3.75 million.” (This response was followed by a protracted and uncomfortable silence)

Prospective Funder then asked another question: “What does your cap table look like?”

CEO: “We have 5 billion authorized and currently 1.5 billion issued and outstanding.”

To this, the Prospective Funder said, “OK, clean up your debt and cap structure, and come back and see us when you are done.”


This is a typical outcome for an otherwise successful microcap company. One cannot build a successful company on convertible debt financing. It will work for a while (6 months of you’re lucky) but, eventually, the debt and subsequent bloating of the company’s capital structure will come home to roost.


Most management teams choose to continue this strategy because the alternatives, while simple, involve much more work and even more time. Eventually, the scum pond of convertible debt financing will dry up and leave no alternatives at all. Once the money dries up, the music stops, the stock collapses and the Company cannot afford to keep their filings current with the SEC and now go into default with their lenders.


I speak from my own experience and from experience of working with many microcap companies who followed this easy financing method. Nearly all of them have left a dead shell behind. They sold off the assets and paid what bills they could. Bankruptcy seems like the most viable option but bankruptcies are very expensive making this process a non-starter for most.


The Solution

As stated before, one solution for microcap companies is simple but involves some work and will take a little time. Here are some paths:

  • Restructure your debt and capital structure and go cold turkey off the debt financing.

  • Get current with the SEC – I know funders that can help with this process.

  • File an S-1 with the SEC; once effective you can tap into an Equity Financing Agreement (EFA), Stock Purchase Agreement (SPA) or an Equity Line of Credit (ELOC) and pay 20% vice 50-150% (or more if in default) for money. The beautiful thing about the ELOC is… the money does not have to be “paid bac,” as it is traded for equity and not a loan. Again, I know funders that help with this process.  It has very little, if any, derivative liability, subsequently enhancing your balance.

  • Find a good Investment Banking Firm to get you to the next level. The equity investment from the EFA (equity finance agreement), SPA (stock purchase agreement) or ELOC should carry the Company until even better money is raised.

  • Because it is difficult to get a fair valuation in the microcap marketplace, some, or all of the above can position your company to up-list to a senior exchange.

  • And FIGHT convertible toxic debt tooth and nail.

Maybe this sounds like “pie in the sky”. However, it can be done with the right connections and working with the right entities and people.


True capital formation takes time.  Swallowing the bitter pill of convertible debt because the Company needs money now is not the solution.  Take your time.  Put an equity vehicle in place.  Then take more time and form an even better capital structure.

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Mark R. Basile, Esq.