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Restructuring: Re-Boot towards Building a Microcap Company

Updated: Aug 7, 2021

A few weeks ago, a CEO of a microcap company was telling me a story all too familiar to microcap OTC Markets trading issuer CEO's. 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 dime 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 revenue producing microcap company. One cannot build a successful company on convertible debt financing. It will work for a while (6 months if 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 Restructuring Solution

As stated before, the only real solution for Microcap companies is simple but involves some work and will take a little time. Here is the path:

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

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

  • Find a good Investment Banking Firm to get you to the next level. Acquisition funding for EBITDA positive revenue companies is easy to come by, just make sure the business target is complimentary to your core business.

  • Once you have several LOI's in place for those acquisitions, get an enterprise valuation done by a third party valuation company recognized by NASDAQ or the NYSE.

  • Once the debt is cleared, the cap table is manageable, and the targets identified and your company has a new enterprise consolidated valuation, you are ready for the next step, getting an underwriter.

  • For those toxic debt obligations that refuse to work with the company, fight them tooth and nail, the survival of your company depends in it!

True restructuring and 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 a restructuring plan in place.  Then take more time, clean up your company, and attract new clean capital from an even better capital structure not only to improve shareholder value, but to also move to a national exchange when you do qualify.

Joey Chancis is an Executive Restructuring Advisor at The Basile Law Firm, P.C. that focuses a large portion of the firms practice on restructuring public companies. While Ms. Chancis is not an attorney, she works closely with attorneys assigned by the firm and the client’s management team to develop a restructuring plan specifically designed for the client. Joey is always available to discuss how a restructuring can help your company – as a former CEO of her own public company, she knows the stress and complexities of what you are going through. You can contact Joey at for more information.


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