Microcap Misfortune: Distressed Baby Bonds and a Founder's Fight for Survival

Executive Summary:

In this post, I explore a publicly traded microcap company whose business faces secular headwinds. In many ways, this is a classic #shitco company situation: the company has a tiny microcap and no sellside coverage, revenues are declining, profits are elusive, and shares trade by appointment only.

What’s probably the most surprising in all of this is that the company managed to issue baby bonds during the ZIRP era and stuff them with retail investors (the bonds can be bought in most retail brokerages). These bonds are unsurprisingly now trading at distressed levels given the fact pattern above.

While admittedly a challenging situation, there are some positives here. Current liquidity is quite strong which combined with an extremely loose credit doc and an unsophisticated holder base creates a situation that is prime for liability management. The likelihood of this is perhaps further magnified given the founder’s continued involvement in the business as well as significant ownership in the equity.

Later in this post, I’ll walk through how this might play out and elaborate what this means for both the company’s debt and the equity.