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Ironridge Global Partners, LLC: Filling The Gap For Small-Cap Companies

David Kugelman

President and CEO at Atlanta Capital Partners, LLC

Summary
•One of the biggest changes in the market I have witnessed over the past 30 years is the lack of access to capital for small companies.
•The regional investment banking firms got swallowed up by larger firms and most of the smaller firms simply closed their doors.
•Since the number of underwritings for small-cap companies by brokerage firms has almost disappeared, CEOs of public companies need to learn how to survive with institutional investors.
•A large number of small-cap companies will probably end up dealing with an institutional investor that makes direct equity investments in micro-cap public companies.

This past week's stock market gyrations left investors bruised, but not battered, as the week ended with a rebound. I couldn't help but think about how 27 years ago I was 23 years old, sitting at a desk at Thomson McKinnon Securities, watching the Dow Jones Industrial Average crash as it fell 507 points, or 22%, to 1,738. As I reminisced, I thought of some of the more sweeping changes I've seen in the industry and how those changes have been perceived. As my career path continued through firms like Bear Stearns and Merrill Lynch, one of the biggest changes I have witnessed is the lack of access to capital for small companies. The regional investment banking firms got swallowed up by larger firms and most of the smaller firms simply closed their doors. This has left a tremendous void in the small-cap sector of the market, which is almost devoid of ways to fund American business. Where is a small-cap CEO supposed to go for funding? What's the best way to structure the deal?

Unless you are a CEO with a lot of wealthy family and friends, you will probably end up dealing with an institutional investor that makes direct equity investments in micro-cap public companies. I think I've had some experience with just about all of them, but rather than focus on the ones I have a negative opinion of, I thought I'd focus on one I have found particularly easy to work with. Ironridge Global Partners is an equity investor in micro-cap public companies. Ironridge is a long only institutional investor, which means they never short stocks. Their transaction sizes range from $250,000 to $25 million each. They work with companies whose shares are traded on exchanges worldwide. The principals of Ironridge have successfully completed billions of dollars in financial transactions over the last 20 years and have devised some processes that allow their firm to structure transactions based upon each company's unique situation.

In a highly risky sector of the market, where a complete loss is a real possibility, Ironridge Global is willing to write large checks and give companies an opportunity to succeed. I have known John C. Kirkland, who is the Co-Founder and Managing Director of Ironridge, since he was the partner in charge of the securities group at Luce Forward. Prior to that, John was the partner in charge of the securities practice at the Los Angeles office of megafirm Greenberg Traurig, so I was always confident in his abilities. In fact, a few months ago, international corporate finance publication, Finance Monthly, voted John Kirkland as a winner of the Finance Monthly CEO Awards 2014 for North America. Brendan T. O'Neil, CFA and Keith Coulston, round out the Ironridge management team. Brendan was President and Chief Investment Officer for Enable Growth Partners LP from its inception in 2003. Enable was one of the largest and most active funds in the micro-cap space, completing over 500 financing transactions and investing more than $600 million in life science, technology, energy, cleantech, and consumer companies. Brendan held senior Investment Banking and Sales positions at Sutro & Company, Morgan Stanley Dean Witter & Co., and Salomon Smith Barney, and has earned the coveted Chartered Financial Analyst designation. Keith also has nearly two decades of experience in the securities markets.

One thing that strikes me most about Ironridge Global Partners is the large number of repeat deals they do for the same companies. This is about the strongest evidence I can think of that they make a good financial partner. Ironridge Global has done three deals for $5 million with Marley Coffee maker Jammin Java Corp. (OTCQB:JAMN). According to founder and chairman, Rohan Marley, son of legendary performer Bob Marley for whom the brand is named, "Ironridge is absolutely the best investment partner we've ever dealt with. With each round of investments, we have been able to grow the company in a way that the market and our shareholders have supported." It doesn't get much better than that. Ironridge has done four deals with Ascent Solar Technologies, Inc. (NASDAQ: ASTI) for $16 million. Victor Lee, Ascent's president and CEO, calls Ironridge "a sophisticated and well recognized technology investor." PositiveID Corporation (OTCQB: OTCQB:PSID) has done multiple deals with Ironridge Global over more than three years. "During that time, without exception, Ironridge has followed the financing structures as defined and documented," according to PostiveID CEO, Bill Caragol. "Further, at times when these financing agreements presented challenges in their operation, I found the principals at Ironridge to be very cooperative in attempting to find solutions," says Caragol, who adds, "I always found that the principals of Ironridge tried to use reasonable business judgment to do what was in the best interest of the company and its stockholders." Such an investor is a rare breed in today's world.

Ironridge Global Partners, like any other business, hopes to turn a profit. What differentiates Ironridge from other institutional investors is that it is a completely passive investor. They write the check and pray for the best outcome. They do not ask for a board seat, restrict the use of proceeds, or even vote their shares. On every transaction, Ironridge Global puts their full faith, along with a significant amount of capital, into the company they are investing in, as well as the company's business plan. Should the company fail, Ironridge stands to lose everything. Should the company prosper and do well, Ironridge stands to make a significant amount of money--along with the other common shareholders. They specifically look for situations where a good company gets in a financial jam, or where the additional capital can fuel explosive growth. One such situation Ironridge was involved in was Advaxis, Inc. (NASDAQ: ADXS). Ironridge invested in ADXS in late December 2012, even though the market was going into the tax selling season. Two months later, the stock was up over 450%. ADXS was able to use the money invested by Ironridge to push their company forward and the shareholders prospered. Ironridge Global's first funding was MEI Pharma, Inc. (NASDAQ: MEIP), which has done well since. Since then Ironridge has done over 70 deals for up to $25 million each, including over $1 million for AVT, Inc. (OTCPK:AVTC), whose stock more than doubled to $5.00 per share from when Ironridge funded until the deal concluded. Similarly, shares of Uluru, Inc. (OTCQB:ULUR) have more than doubled since Ironridge did its deal with the company. Ironridge Global is still a common stockholder of every portfolio company it has invested in since inception.

Even with a slew of winners, there are still some companies where the return has been less than favorable. Institutional investors, like Ironridge, take a significant amount of risk every time they write a check to a publicly traded company. They breathe life saving capital into a company at a time when no one else will. Ironridge has given numerous small companies an opportunity when they are in the red-zone, which, for non-football fans, is that important slice of real estate from the opposing 20-yard line to the goal. As I mentioned before, Ironridge is a passive investor and there are no restrictions on the funds they invest in a company. Ironridge is willing to directly invest the necessary capital in a company so they can keep the doors open and have a chance to get to the next level. At the risk of reliving the glory days, when I first got in the business in the mid 1980's, once a CEO got funded it was up to him to show a return to shareholders, or be showed to the door by the Board of Directors.

Summary

When John Kirkland was asked "What advice do you give to rising CEOs?" His response was simply "Always do what you promise. The rest will take care of itself." Also on their website you will find a Testimonial page. I was happy to see quotes from three people my company has worked with, who I have a great deal of respect for. Allison Tomek, Sr. VP of PositiveID is quoted as saying "Keith is incredibly responsive, knowledgeable and trusted. PositiveID's relationship with Keith and Ironridge Global Partners has been very constructive and his firm takes a passive and flexible approach to providing capital. Keith is a detail-oriented professional and it is a pleasure to do business with him and the rest of the Ironridge team." Joseph Canouse, CFO of Fresh Promise Foods is quoted as saying "John and his firm are innovative, creative and dependable. He has proven reliable beyond our expectations and I would highly recommend him and his firm." Jack Wright, Ph.D., who is Director of Investment Banking for Galileo Asset Management, said "Brendan returns 100% of his phone calls in a timely fashion. We were very satisfied with the $2.5 million funding [Ironridge] closed for a client of ours in 10 days. Excellent job."

But even the best investors cannot control what the company does with their money. The real responsibility for the success or failure of a publicly traded company rests on the shoulders of its management. Both small and large shareholders are passive and depend on management to make the best decisions for the company and its business plan. When a public company gets an infusion of capital from an institutional investor, the best possible plan would be to put the money to work for the shareholders and not for fat executive salaries and lavish perks. Early employees at Home Depot were teased by their friends for accepting $5.00 an hour cashier jobs. A few years later these same cashiers made millions off of their stock. The only chance small-cap companies have to be successful is to obtain funding from good financial partners like Ironridge Global, who are willing to write the check and take the risk. Since the number of underwritings for small-cap companies by brokerage firms has almost disappeared, CEOs of public companies need to learn how to survive with institutional investors. Shares of stock become the company's currency. In my opinion, it makes more sense to focus on executing the business plan, increasing the volume of the stock, and increasing the number of shareholders than to devalue the currency.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Themes: economy, institutional investor, Ironridge Global Partners Stocks: JAMN, ASTI, PSID, ADXS, MEIP, AVTC

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