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Guest Post By: Tom Allinder

I was speaking to a funder of microcap companies last week. He was describing how the microcap market is continuing to fall apart.

I asked him what the problem was…

“Convertible debt and the funding instruments the companies are using,” he replied.

“We are seeing this across the board now. When a company starts filing 8Ks on debt conversions, the volume just dies,” he said.

One of the things I have observed over the last few years is the fact that investors are getting more and more educated about their investments. Today, at the microcap level, where few do any due diligence, there is more than enough message board and Twitter “leaders” who post the 8Ks for everyone to see. They even explain, in their own words with adequate embellishment, what the 8K means to the less perceptive and easily led investors.

The constant dilution of their investment is chasing them out of microcap stocks.
In the past, investors only knew that microcap companies they were invested in were diluting their stock. They did not know why. They would beg, plead and in some cases, DEMAND that the company stop diluting their stock.

These investors knew nothing of how funding at the microcap level is done. They thought that the company itself was selling stock, or the CEO was selling his or her stock. They believed that the dilution was more about putting money in the pockets of the company insiders.

In the microcaps, in some cases, they are right. However, most are well-intentioned companies that are trying to build a business. A few bad apples spoils the whole barrel though.

When I was the CEO of a microcap company from 2012 to 2016, some message board and Twitter posters posted a picture of “my house” and “my cars” with captions like, “This is Tom Allinder’s house, this is Tom Allinder’s cars bought with our money!”

In the case of the houses photos, they were of lavish mountain retreats or Oceanside mansions. With respect to “my cars”, they were Lamborghinis and/or Ferraris. One individual even went as far as photo-shopping in the exorbitantly expensive automobiles in front of the multi-million dollar homes.

The reality that I have a 2003 Dodge pickup truck with nearly 200K miles on it and live in a somewhat modest home in the mountains of North Carolina was not known and was immaterial to them. The perception created by these posts on message boards and social media platforms were much more compelling to the other investors as well as fuel for the bashers. Fake News has been the way of life in the microcap markets far longer than it has for the mainstream media.

I am seeing the next big thing in the microcap arena though. Companies who are actively doing something to add value to ownership of their stock are seeing positive results. I absolutely do think that those companies that are restructuring, cleaning up their debt and seeking funding from sources that are not going to substantially dilute their stock in the marketplace are going to be the target of microcap investors going forward. Investors will find companies that restructure and clean up debt actually will stand a good chance of appreciating in value if they perform well on the business side and execute their business plan.

A CEO of one company whose stock had dropped from over a dollar to 1.5 cents on debt conversions over just a few months, put out an update along with 8K filings that they had settled some of their convertible debt with their lenders. The update went on to outline a clear plan for paying off the last lender.

In subsequent days, the stock rose rapidly to over 20 cents on heavy volume.

This company happens to be a client of mine and I have been strenuously encouraging him to do something about the convertible debt.

“No matter how much good news you put out to the market, no matter how exciting the story is, and, it is an exciting story, you will go nowhere as long as the debt conversions are coming in,” I told him on more than one occasion.

They did something about it and it worked out well.

Not all companies, in fact very few have the resources to undergo restructuring, pay off or work out their debt thereby hitting the “reset” button. In fact, very few companies have the wherewithal to accomplish this due to a lack of financial resources. However, there are alternatives. OTCWorkouts is working through multiple funders to help the companies that lack the financial resources.

Another victim of the marketplace financing in the microcaps are the funders and lenders themselves. They will provide a loan or a financing for a microcap company then, before they know it, they are in the marketplace fighting with multiple other funders and lenders to sell stock. It becomes a free-for-all battle and a race to zero on the stock of the companies.

In these scenarios, there are no winners. In most cases, the company ends up eventually out of business, the investors lose all of their money and the funders and lenders end up getting only part of their money out of the company. Some resort to litigation against the company and in some cases against the CEO who personally guaranteed the loan. To say the least, it is an expensive and ugly process is no fun for anyone involved.

For the cost of litigation, the funder/lender stands a good chance of getting all or nearly all of their money back out of the company. If the plan works out, they will actually make money in the long run. Restructuring requires the funders/lenders to take a bit of a longer view with regard to their exit.

From an IR viewpoint, the current state of affairs makes the job very difficult and stressful. The greatest IR efforts are more than offset by debt conversions.

Times are changing though. The companies that survive via restructuring and having a plan going forward will do much better.

Those that maintain the status-quo will all end up on the great trash heap of out of business microcap companies.

 

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About Tom Allinder:

Tom Allinder is a former CEO of an OTC microcap company and is Dir. of Client
Outreach for The Basile Law Firm P.C. as well as OTCWORKOUTS.COM. For more information please visit www.Otcworkouts.com

 

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