It was the hardest lesson I have ever learned. It cost me everything. The Business, my personal investment, my reputation and most of all MY WORD to the amazing people that worked for the company, the real supportive shareholders and our loyal clients.
As a former CEO of a small public company that traded on the OTC: JOEY, I had such a phenomenal business model and strategic business plan to scale the company. I had developed a line of beauty and skin care products that were carried by all of the chic boutique salons in NYC as well as opening a group of Botox clinics in South Florida. It was a real business, with real products and a real blueprint for success. All we needed was the capital to get us there. Once we obtain the capital to get up and running, within a year, we would have enough revenues to be able to use those proceeds to operate profitably without the need for anymore outside funding.
We started out on a great path and the company was growing at a very healthy rate with the help of some great angel investors’ and family and friends’ personal financial support.
What went wrong? Well, most small companies and start-ups generally have a more difficult time raising capital than the larger companies with existing revenues. The terms of the funding deals are usually a little more aggressive mainly to protect the lender. That’s understandable. However, in my case and in many other cases as I have come to learn, some of these lenders “trick” you into signing a lending agreement that includes a Securities Purchase Agreement. What this “so-called” Agreement tricks you into believing that there is no interest on the money that is loaned to the company as long as it is paid back on time. However, that’s not the whole truth. The transactions are constructed to use your company’s stock to pay themselves back at devastating discount percentages to the stocks market price.
In my situation, the company did these transactions with several Toxic Lenders, the bottom of the barrel companies that you should run away from as fast as you possibly can. These companies are notorious for destroying businesses and stock price. I don’t have enough fingers on both hands to count how many times we were told that they would “take it easy” or “be responsible” with their selling. Nothing is further from the truth. They have NO INCENTIVE to take it easy because their gains are baked into the discounts when they convert debt into stock, and that discount is applied to all conversions they do, no matter where your company’s stock is trading. So, after my company experienced several conversions of debt to stock, and among all of the “technical defaults” and discount percentages based on certain trading volume and price formula under the transaction documents, these toxic lenders were getting super rich off of acquiring my company’s stock, then selling my company’s stock aggressively driving down its price from over $2.00 to $0.002.
These toxic convertible notes killed my company and there was no chance these lenders were going to settle with the us because all they wanted was company stock at huge discounts so that they could quickly sell into the market within a few days of getting them, to capture the value between the discount and trading price, making tremendous amounts of profit. Simply put, a $100,000.00 note could turn into $400,000.00 in returns for these lenders. I have spoken to dozens of CEO’s that have experienced the same exact effects on their company’s stock. Many of those companies are now Tombstones in the OTC Markets corporate graveyard.
Most everyone in the business knows that on the OTC Markets, your stock price and liquidity are the most valuable assets a company has when first raising money, and since they destroyed the stock, our company could no longer raise “clean” funding capital. I still was not completely aware of the damage that these toxic lenders have done and continue to do so in order to save the company in time. I had to personally loan money to the company to pay all the bills and continue to grow the company all while still looking for investors.
Eventually, I realized that we were not going to survive. I did not have any expert advisors around me to suggest a corporate restructure and debt remediation strategy. If I had known about this then, I probably would have ended up with a very successful company today.
Ultimately, we were not able to afford the accountants to prepare our financial disclosures which was also an issue for the toxic lenders because they could no longer convert their shares with a stop sign on the company stock. They sued the company, and some sued me personally, claiming all sorts of terrible things which were absolute lies but designed to scare me into a settlement. After one settlement, I decided no more settlements. I am going to fight them every step of the way. I did nothing wrong. The company did nothing wrong. They are the ones that should be sued. (I am so glad the SEC is now going after these lenders for violating the Securities and Exchange Act of 1934, but that’s another story for another day). They know they are in a position of power because they destroyed the company’s ability to raise money outside of their types of transactions and the company had no money to litigation for years and years.
Where is the silver lining? They say that sometimes you have to go through hell to come out smarter and wiser. Sometimes when you go through something horrible you can’t see past it and understand why you had to go through it. Well, today I can tell you that I know why I had to experience all of that. I am so honored and proud to be working at a top law firm that focuses its practice on corporate restructuring and debt remediation for small public companies. I did not know about The Basile Law Firm P.C. and didn’t know that my company needed restructuring. I realize now that had I access to such a restructuring program; I could have saved my company. My purpose here is to bring awareness to all those CEO’s and management teams who have toxic debt liabilities on its books and those who have been battered by convertible notes that you have options. Please know there is a solution. You can take action now to rid your company of toxic debt, clean up your balance sheet, recapitalize your company and position your company to attract clean, long term capital. Don’t let them win.
As a former CEO of a small public company, I know that you take pride in your work and what you are building. It’s also hard for us to admit that we should have taken or followed a different path. Understanding your options is the best way to make the best decisions. Don’t let convertible debt tear your company apart!
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 Ms. Chancis at Joey@thebasilelawfirm.com for more information