What early-stage companies should do when capital starts to dry up

By James S. Cassel

Capital is plentiful and the economy is humming, but don’t forget what happened in 2001 and 2008. Suddenly, companies that did not have a path to profitability in the short term were squeezed hard, often into extinction.

Venture and growth capital firms realized that the money they had committed from investors could soon dry up, so they started making tough decisions. For VCs, the lifeblood of early-stage companies, protecting only the best ventures became the mission.

As we move closer towards a possible recession, the time has come for early- stage companies to begin preparation for survival should investor capital become scarce.

What can early-stage companies do to prepare when capital starts to dry up?

The first step is a thorough review of your business model and cash projections. You should evaluate how much capital you have, how much you can preserve, and if your present capital can take you to break even, or to being cash-flow positive.

Be honest about what you see. You may discover a sale is inevitable, and if so, the earlier you start the sales process, or find a partner to help keep you afloat, the better your chances of not having to go into bankruptcy/reorganization or liquidation.

Secondly, if you expect to raise capital down the road, you may want to expedite the timing and do it now. With the economy humming, venture capital might be more available today, but as soon as a recession hits, and maybe even sooner, many will find it next to impossible to raise more capital.

You must also be careful not to let valuation be a hindrance to taking in new capital, or even to taking less of an investment than you had hoped for. A down round in terms of financing is often better than no financing.

Thirdly, you want to monitor and address your burn rate. For example, rather than reaching a milestone and then going off to raise more capital, your challenge is to develop ways to become profitable or cash-flow-positive with what you already have. By addressing this before your cash runs out, you have valuable time to begin moving towards profitability, or at least to break even in terms of cash flow. Again, long-term survival is the goal when capital starts to dry up. You’re looking for the chance to prosper later.

Now, even if you are able to raise capital, you should also have a contingency plan. Consider what happens if you don’t reach your benchmarks even with a capital infusion. You may want to allow for an earlier exit, or you may want to go to market selling your company for less than you’d hoped for.

Despite your best efforts, you may still find yourself out of capital, and if a recession hits, you’ll need to make tough choices. Maybe it will come down to deciding if you should run a sales process to at least get some value while you still can. Or, maybe it will be better to consider liquidation and get out with what you can, while you can, returning unused cash to investors. Something may be better than nothing.

Depending on your capital structure, you might have to change your original financial structure to get some relief. You may find that converting debt into equity is the smartest play, but another option might be restructuring in conjunction with offering better terms to potential investors, which might be your last-best effort to secure much-needed additional capital. Whatever move is best for you, remember to engage with an investment banker earlier in the process rather than later, as they can provide invaluable advice.

Money remains relatively accessible for early-stage companies, but it will dry up sooner than you think. Surviving a capital dry spell when you are running an emerging company means preparing early and acting quickly when the winds suddenly change.

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Why Do Investors Keep Funding Unprofitable Startups?

When I got my start in the startup world, I thought success meant becoming profitable in around five to seven years, preferably sooner. It was an assumption, and you know what they say about assumptions.

To be fair to me — and I love being fair to myself — the vast majority of venture-backed companies in my space were experiencing this lifecycle. First there was the seed round that catalyzed growth. Then came series A, B and C to continue scaling and ultimately reach profitability, or at least a short path to profitability.

D rounds were rare, and I haven’t heard of an E or F round. After D it seems like venture capitalists don’t bother with the alphabet anymore.

If the brand couldn’t raise funding, that was the end. Or, if the startup had plenty of investment but couldn’t pave a short path to the black somewhere between A and D, VCs would pull out and cut their losses.

Without funding, brands that still couldn’t become profitable would arrive at painful crossroads: stop growing, lay a bunch of people off or get acquired. The acquisition outcome was best, but it didn’t guarantee the company would maintain its identity or that the employees would keep their jobs. Usually the acquiring corporation hacked the startup apart and retained only the aspects they believed were most valuable.

Over and over again I saw some version of this story play out. It seemed like profitability was essential for a startup to survive past that five-to-seven-year period.

In recent years, however, I have noticed an increasing number of exceptions to this pattern. At one of the last startups I worked for, we passed our series C and were still far from being in the black.

During a company meeting, our CEO asked our CFO when we were expected to become profitable. The CFO shrugged and said he didn’t know. After the CEO pushed him a bit, he estimated it would be some time next year.

It’s been about two years since he casually threw out that figure, and the company still isn’t profitable. Recently they raised a D round, but it will most likely not be enough to push them into the black.

When I met up with some of my former co-workers for dinner a few months ago, they said the brand still wasn’t profitable, and they had no idea when it was projected to start making money. They didn’t seem worried about their job security, though.

The implication was that more money would come. There were plenty of venture capitalists out there who would fund them indefinitely. Being profitable just wasn’t the top priority.

This revelation was bewildering. What was I missing? Was I the only person who thought it was problematic for a company to rely on funding for well over seven years, perhaps 10 or more?

Fortunately I wasn’t alone. Both online and in person I connected with many colleagues who didn’t understand why some startups folded — and they lost their jobs — after failing to make money, while other brands tapped into a seemingly limitless supply of VC funding and figured out profitability at their leisure.

To get answers, I reached out to investors and other experts in the startup world. Here are the big takeaways from my conversations with them:

The Amazon Effect

For about two decades Amazon relied on investors to grow and stay in business.

“One of the main reasons for Amazon’s success was their ability to raise capital and have a story where people believed they would be profitable,” said James Cassel, Founder and Chairman of investment banking firm Cassel Salpeter & Co.

This faith ultimately paid off. In the first quarter of 2019 the e-commerce giant reported about $60 billion in net sales, and it seems like they will maintain these types of massive profits for the foreseeable future.

Now investors are betting on what they believe might be the next Amazon. To draw this comparison, almost all of my sources mentioned two names: Uber and WeWork.

Uber was founded about a decade ago, and it isn’t remotely close to being profitable. In an article for Forbes published in June, Columbia Business School professor and former Accenture partner Len Sherman wrote, “Until and unless Uber can find ways to overcome the numerous weaknesses in its business model, the company will never be profitable.”

If Uber does fix these problems, however, there is potential for investors to make a killing. Like Amazon, maybe it needs another decade.

WeWork is a similar case. Business Insider recently reported that the company lost $219,000 every hour of every day during the 12 months leading up to March. But, again, perhaps the brand needs another decade.

These indefinitely funded startups don’t need to be nearly as titanic as WeWork or Uber, though. The company I mentioned earlier — the one I worked at that is past series D now — had something like 100,000 customers by the time I left. Compare that figure to the 95 million people who used Uber in 2018.

Growth Over Profit

Investors often evaluate startups based on growth, not profitability. Even if the company is burning way too much money, building a big base of customers quickly is attractive to venture capitalists, said Alan Wink, Managing Director of Capital Markets at accounting and consulting firm EisnerAmper.

Sometimes founders need to sacrifice short-term profit for customer acquisition spend and expansion that could provide long-term profit. As long as revenue is high, they have a chance of getting more funding.

“Going for profitability too early often means limiting growth,” said Techstars Co-Founder David Cohen, who was also an early investor in Uber.

Choosing not to be profitable in favor of growth — even for many years — can be a successful strategy, so long as that profit can make a huge splash.

“Amazon is a great example of a company that reached that tipping point, and it paid off big time,” said Clearbanc Co-Founder and CEO Andrew D’Souza.

Motivations Other Than Profit

It’s common for profit to be one of the last issues investors consider. Algorithm Research Founder Ketaki Sharma claimed that, according to her analytics and experience in the business, most venture capitalists choose a startup based on their sector focus before scrutinizing the startup itself.

If an investment firm specializes in healthcare, for example, they try to completely dominate the landscape by pouring money into as many healthcare brands as possible. That way their competitors are left with a smaller slice of the pie and less potential profit. This approach can increase the valuation of their portfolios, and in the investment world this metric is often more important than profit.

Investors can still make money from unprofitable companies. VCs frequently sell shares or take part in acquisition deals.

Another factor is what Glimpse Group CEO Lyron Bentovim called “hype.” “Investors will invest money to have the Uber logo on their site,” he said.

When VCs are able to advertise that they work with hot brands, they gain an advantage when pursuing the next promising startup. Even if they lose money on an unprofitable but hyped startup, having such a brand in their portfolio could attract companies that ultimately turn a profit.

Recovering From the Recession

Many of the people I spoke to noted an improved economy and one of the longest bull markets in history as a factor for this increase in potentially risky investments. It doesn’t seem like a coincidence that these types of funds have flourished as we recovered from the recession of the late 2000s.

Several experts cautioned, however, that there could be another recession that would cut off access to much of this capital. These comments were in line with predictions from economists and politicians such as Elizabeth Warren.

Shouldn’t We Care More About Profit?

Just because it’s become more acceptable to deprioritize profit doesn’t mean this attitude is ideal.

“There’s this behavior pattern where people have forsaken or forgotten profitability in exchange for growth at any cost,” said Fresh Technology Chairman Matt Bodnar. “Some companies will implode, and we will look back and say that was ridiculous.”

The investor community is constantly enabling startup founders to spend irresponsibly. We shouldn’t fool ourselves into thinking growth and profitability are mutually exclusive. After all, there can only be so many Amazons.

Bio: I am the Content Marketing Manager at Public Goods and an official member of the Forbes Communications Council. I am also the author of “Teach Me How To Die,” my self-published novel about a widower who travels through the afterlife.

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A charge, a guilty plea and when victims can see money: update on a $322 million fraud

By David J. Neal

Here’s what happened recently in the multi-platform legal untangling of 1 Global Capital, the Hallandale Beach merchant cash advance business at the center of a $322 million investment fraud.


A plan of liquidation for 1 Global was filed last week in federal bankruptcy court by Greenberg Traurig’s Paul Keenan, who said the investor approval vote drew 2,425 out of over 3,600 investors, the highest he’s seen in a consumer case. That plan would go into effect in mid-October. The initial distribution of $100 million to investors will be made in early November.

But that’s a pittance compared to the amount of the fraud discussed.

“There are 3,600 investors who are going to lose money,” said 1 Global Capital’s bankruptcy court-appointed independent manager James Cassel of Cassel Salpeter investment banking firm. “These are Ma-and-Pa investors who put all their money in this.”

And 1 Global’s former CEO Carl Ruderman took money out, according to documents in several cases.

In the admission of facts accompanying former 1 Global CFO Alan Heide’s guilty plea (see below), Heide says Ruderman began to use the cash coming in from new investors to pay large commissions; to pay earlier 1 Global investors, Ponzi-scheme style; to operate Ruderman’s unrelated businesses; and for Ruderman and the Ruderman family’s “lavish” lifestyle. This, while 1 Global was operating in the red.

After a judgment gained in August by the Securities and Exchange Commission, Ruderman owes $32 million in money gained fraudulently; a $15 million civil penalty; another $750,000 cash; and 50 percent equity in his Aventura Bella Vista North condominium, which online property records say he bought for $2.7 million in 1999.

Ruderman has not been charged criminally, which is why he’s referred to as “Individual No. 1” in other parties’ criminal case filings.

1 Global sold itself to investors as operating similar to a payday cash advance place, except with a customer base of small businesses. Instead of repayment in one lump sum, payments came in the form of automatic withdrawals.

Numerous lawsuits have been filed to get something out of businesses that defaulted on the cash advances.

  • Jan Atlas, a 74-year-old Fort Lauderdale attorney, has been accused of using his corporate legal skills to help Ruderman continue doing business as they were. Atlas has been charged by information with one count of securities fraud.

Ruderman and an attorney came to Atlas when questions came up about whether 1 Global was selling a security and if it needed to register an investment offering with the SEC.

The allegations in the information document say, “Atlas came to understand that (Ruderman) and Attorney No. 1 were not interested in accurate legal advice based on real facts, but instead wanted false legal cover that would advance their desired outcome and allow them to profit from 1 Global.”

So, prosecutors say, Atlas gave them what they wanted in a May 17, 2016, opinion letter in which he “intentionally made false and misleading statements” and did the same in an Aug. 25, 2016, opinion letter. And that Aug. 25 letter, the allegations say, was used by 1 Global to keep raising money under false pretenses.

An email to the Miami Herald from Atlas’ attorney, Margot Moss of Markus/Moss’ law firm, said, “Jan is a good man who had a wonderful, successful career. But like all of us, he wasn’t perfect. He has quickly accepted responsibility for his actions in this case and shown genuine remorse. He will do everything he can to make this right.”


  • As mentioned above, former 1 Global CFO Alan Heide has pleaded guilty to one count of conspiracy to commit securities Fraud

Heide’s admission of facts says though he knew 1 Global wasn’t profitable and knew Ruderman was misusing funds, he kept “providing false and misleading statements to investors as to the financial health of 1 Global Capital, including making statements that gave the false impression that 1 Global had an independent auditor.”

Heide will be sentenced on Dec. 13.

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China Has More Control Over Your Prescription Drugs Than You May Think

  • Experts are expressing concerns over how much control China has over the U.S. pharmaceutical supply chain.
  • They say China has a long-term strategy of lowering costs to drive
  • U.S. drug manufacturing out of business.
  • They also point out problems with the quality of drugs and ingredients from overseas, which was seen in last year’s recall of blood pressure

How you tackle a skin rash may become a matter of national security.

Most pharmaceuticals used in the United States are either made in nations such as China and India, or use ingredients that come from those countries.

Which means much of America’s collective health not only depends on diet and exercise, but also on our relations with those countries.

And during a time when terms like “trade war” are being thrown around daily, experts say it’s vital to understand all the possible consequences.

Even ones that might sound like something lifted from a Tom Clancy novel.

“If we had a pandemic and we needed drugs from another country, it could become a defense issue,” James Cassel, the co-founder of Cassel Salpeter & Co., which oversees mergers and acquisitions of healthcare companies, told Healthline. “It’s scary. Tariffs are one thing. But what if they just decide not to make something available?”

Other experts say there’s too much money at stake for countries like China to hold its drug manufacturing advantage over the United States, unless there’s an extreme confrontation.

“I feel this is highly unlikely, as the pharmaceutical industry in China is a priority industry and they need the U.S. orders and the U.S. technologies that often come with these contracts,” said Falguni Sen, PhD, director of the Global Healthcare Innovation Management Center at Fordham University’s business school in New York. “Can they do it? Sure they can. But I do not see any reason they would do that in pharma.”

A fragile supply chain

Nevertheless, as the rhetoric heats up between Washington and Beijing, the fragile nature of the pharmaceutical supply chain is being discussed at the highest levels of the U.S. government.

“The national security risks of increased Chinese dominance of the global API (active pharmaceutical ingredients) market cannot be overstated,” said Christopher Priest, the acting deputy assistant director for Healthcare Operations and TRICARE Health plan programs for the Defense Health Agency, which provides healthcare and prescription drugs to the military.

His comments came at a U.S.-China advisory panel in August.

“Basically, we’ve outsourced our entire industry to China,” retired Brig. Gen. John Adams told NBC earlier this month. “That is a strategic vulnerability. I think they know exactly what they’re doing and they’re incredibly good strategists. They’re doing this, they select their industries for the future and they’ve got a plan.”

That plan is a long-term approach to pricing, said David Jacobson, MBA, JD, who teaches global business strategy at Southern Methodist University in Texas and is a visiting professor at Tsinghua University in Beijing.

Because the U.S. system is based on finding the supplier with the lowest costs, he said China uses that to its advantage.

“At first glance this may seem great because it lowers the cost for consumers, at least temporarily,” Jacobson, who has testified before federal panels on China’s state-owned enterprises, told Healthline. “But Americans, from the government to consumers, play a very short timeline game. Our rivals in China are far better at using a long-term approach. So China allows pharmaceutical pricing to become so low that it drives Western companies out of the manufacturing business.”

So, wouldn’t the United States be grateful China keeps manufacturing costs low?

Jacobson said that’s part of China’s plan.

“They are making strategic decisions to drive us out of business so that they have strategic control over critical supplies of drugs and drug companies,” he said. “The entire USA healthcare system market for generic drugs has moved offshore, primarily to China. Virtually no one is making generics in the USA. Most drugs utilized in the USA are generics. Now we are very vulnerable.”

Controlling the supply

Jacobson said the system keeps the United States at China’s mercy in the event of a health crisis, even if China doesn’t have ill intent.

“What if a large-scale health problem is confronting the population of the USA and China at the same time? China will prioritize its population at the cost of ours,” he said.

Controlling our pharma supply also means China can withhold supplies just to affect our markets, which Jacobson said is even more dangerous.

“Bright-thinking U.S.-based healthcare communities are seeing this dynamic and working to bring back generic manufacturing and component manufacturing as a national security issue because of the danger of being so dependent on a rival for our well-being,” he said.

We got a glimpse of what a supply chain crunch could look like last year when Hurricane Maria’s damage in Puerto Rico caused a shortage of IV saline bags in the United States.

However, even if China doesn’t intentionally tamper with the supply flow, problems can arise.

“There have been supply chain problems in the past,” Yali Friedman, PhD, an author and founder of DrugPatentWatch.com, told Healthline.

Friedman pointed to the contamination Trusted Source of the blood thinner heparin in 2007 and 2008 that resulted in the deaths of 149 people in the United States.

The Food and Drug Administration responded by stationing inspectors overseas.

There’s also the recall of blood pressure medications that began in July 2018 due to a contaminant in ingredients made in China and India.

“Constant vigilance is essential to ensure the safety of these medicines,” Friedman said. “Supply chain safety is something which regulators are aware of and they are constantly seeking to stay ahead of threats.”

Even then, there’s problems with quality in China, Jacobson said.

“The upper middle class and wealthy population of China never use a generic produced because they know the quality control is so weak. They always buy Western brand-name pharma products to protect themselves and their family,” he said.

Sen told Healthline there are other problems with the supply chain, including other countries not having enough inspectors, lack of control over the manufacturing sites, and “natural disasters, such as earthquakes, hurricanes and fires.”

Even having enough penicillin could be problematic because the last penicillin manufacturing plant in the United States closed in 2004.

Again, it all comes down to cost, said Sen.

The manufacturing issue

Sen says U.S. drug companies prefer to spend money on developing new drugs, rather than manufacturing them.

“Manufacturing has a different culture from one of being focused on drug discovery and marketing,” he said. “Managing two different cultures is very difficult, and if you did not have to do it, you would avoid it.”

So, if economic incentive won’t bring drug manufacturing back to the United States, what will?

“I see it not as an economic concern, but more of a national security concern,” said Sen. “I hope we will have some key manufacturing capabilities in this country to particularly manufacture vaccines when needed and not have to depend on other countries to help us deal with epidemics.”

Two House Democrats from California co-authored an opinion piece on the matter earlier this month in the Washington Post.

Adam Schiff and Anna Eshoo pointed out that if current economic conditions with China further erode, the Chinese could seek “pressure points” to leverage against the U.S. in pharma manufacturing.

Costs could surge or China could manipulate shortages. They wrote that they plan to hold hearings soon.

“We should not be held hostage by any foreign country,” Eshoo told NBC.

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Broward Attorney Accused of Helping Company Defraud Investors

September 18, 2019

By Brian Bandell

Federal prosecutors have accused Fort Lauderdale attorney Jan Douglas Atlas of helping 1 Global Capital LLC defraud more than 3,600 investors.

The Securities and Exchange Commission also filed a civil lawsuit against Atlas over securities law violations involving 1 Global Capital.

The Hallandale Beach-based financial company, which provided loans to small businesses, filed Chapter 11 in U.S. Bankruptcy Court in 2018. Soon after, the SEC filed civil fraud charges against 1 Global Capital and former CEO Carl Ruderman, alleging they fraudulently raised $322 million from investors.

In August, former 1 Global Capital CFO Alan G. Heide pleaded guilty to criminal fraud charges for authorizing false financial documents for company. He will be sentenced Dec. 12.

In the latest development, Atlas was charged with securities fraud in federal court in Miami on Tuesday. As outside counsel for 1 Global Capital, Atlas authored a legal opinion he allegedly knew was false: that the company’s investment products were not a securities offering as regulated by the SEC, according to court documents.

“Jan is a good man who had a wonderful, successful career. But like all of us, he wasn’t perfect,” said Anita Margot Moss, his attorney in the criminal case. “He has quickly accepted responsibility for his actions in this case and shown genuine remorse. He will do everything he can to make this right.”

Atlas and his attorney, Anita Margot Moss, couldn’t be reached for comment.

Prosecutors said Atlas was paid $627,000 for his services to 1 Global. They asked that any funds Atlas received from fraudulent activity be forfeited, court documents said.

If found guilty, Atlas could face up to five years in prison.

According to the SEC lawsuit, 1 Global overstated the value of investors’ accounts and their rate of returns, and misappropriated at least $32 million to personally benefit Ruderman. Because the company allegedly relied on Atlas’ false opinion letters when attracting investors, the SEC charged Atlas with aiding and abetting securities law violations. He could face civil penalties.

“Atlas disregarded his position as a gatekeeper and instead issued opinion letters containing false information, enabling 1 Global to continue its illegal offer and sale of notes to retail investors,” said Eric I. Bustillo, director of the SEC’s Miami office. “We allege that Atlas was able to profit handsomely for his role, wrongly receiving hundreds of thousands of dollars of investor money.”

To settle the SEC lawsuit, Ruderman agreed to disgorge $32 million in ill-gotten gains, pay a $15 million civil penalty, turn over $750,000 in cash and give the SEC a 50% interest in his condominium. He was also barred from working in the securities industry.

Cassel Salpeter Chairman James Cassel, who was appointed director of 1 Global’s estate in bankruptcy court, said about $100 million will be recovered to repay investors and settle lawsuits. Investors will receive about 30 cents on the dollar, he said. Any money the SEC recovers from Ruderman as part of its settlement with him would be paid to investors on top of that amount, Cassel added.

Going forward, 1 Global will pursue more litigation claims and continue to collect on its loans from businesses, said Greenberg Traurig attorney Paul Kreen, who represents the debtor.

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Investors in Securities Fraud Scheme to Get Millions Back

September 17, 2019
By David Lyons & Marcia Heroux Pounds

More than 3,600 investors who lost savings to an alleged securities fraud involving a South Florida cash-advance company stand to recover $100 million from a bankruptcy court liquidation, lawyers said Tuesday.

In a related development, federal authorities in civil and criminal actions announced they charged a Fort Lauderdale lawyer and former outside counsel for 1 Global Capital with aiding a securities fraud scheme that the government alleges defrauded investors in 42 states out of $332 million.

1 Global Capital promised investors a profit from loans it made to small and midsize companies. But much of the money went to CEO Carl Ruderman’s personal spending and his consumer-loan companies, the Securities and Exchange Commission alleged in a civil complaint filed last year. The commission alleged Ruderman misappropriated $35 million on spending that included a vacation to Greece, a Mercedes-Benz and a personal chef.

Headquartered in Hallandale Beach, 1 Global Capital operated from early 2014 until July 27, 2018, when it filed for bankruptcy. As of that time, Global had raised more than $330 million. Internal documents showed a $50 million cash deficit, the SEC alleged. A federal judge granted an SEC request for an asset freeze against Ruderman, 1 Global Capital and several affiliated companies.

“The SEC’s investigation effectively stopped 1 Global’s offering and prevented further harm to investors and retirement funds,” Eric Bustillo, head of the SEC’s regional office in Miami, said at the time.

At a hearing Tuesday, U.S. Bankruptcy Judge Raymond B. Ray in Fort Lauderdale approved a plan that would return a sizable portion of the millions raised by 1 Global Capital.

“Everybody worked together to be able to return as much money as possible to these individuals who had their net worth put into this,” said James Cassel of the Miami investment banking firm Cassel Salpeter, independent manager of 1 Global during its bankruptcy. “It was a sad scenario. We made a lot of progress and collected a lot of money.”

Paul Keenan, a Greenberg Traurig attorney who represents the company in the bankruptcy, said the plan had widespread support. “Everyone is supporting the plan,” he said. That includes investors and the SEC.

Out of the 3,600 people affected, 2,425 investors returned ballots approving the repayment plan, Keenan said. He predicted cash distributions wold take place in early November.

Criminal, civil charges against lawyer

Jan Douglas Atlas, 74, of Fort Lauderdale, is accused in a criminal information of one count of securities fraud, according to a news release from the U.S. Attorney’s Office. He faces a potential maximum statutory sentence of up to five years in prison and a fine of up to $10,000.

Atlas, a long-time South Florida securities lawyer, wrote two opinion letters in 2016 that allegedly contained false information describing how 1 Global Capital investment actually worked and the duration of the investment, which omitted information about its automatic renewal, the U.S. Attorney’s Office said.

In a statement, Miami attorney Margot Moss, who represents Atlas in the criminal case, said her client “is a good man who had a wonderful, successful career.”

“But like all of us, he wasn’t perfect,” Moss said in a statement. “He has quickly accepted responsibility for his actions in his case and shown genuine remorse. He will do everything he can to make this right.”

Atlas also faces a parallel civil action filed by the SEC, which charged him Tuesday with aiding and abetting through the issuance of fraudulent opinion letters. The commission’s complaint alleges 1 Global used the letters to falsely represent to a network of external sales agents that its notes were not securities and that its offering did not have to be registered with the SEC.

Altas, the SEC alleges, received more than $600,000, a figure which represented a percentage of the commissions generated from the sale of 1 Global notes. “Atlas disregarded his position as a gatekeeper and instead issued opinion letters containing false information,” said Bustillo, the SEC regional director.

The charges against Atlas come less than a month after 1 Global Capital’s chief financial officer, Alan Heide, entered a guilty plea to one count of conspiracy to commit securities fraud.

The SEC previously charged 1 Global and Ruderman, the CEO, with fraud, and charged Henry J. “Trae Wieniewitz, III, an external sales agent, for his allegedly unlawful sales of 1 Global securities.

In a statement last month, the commission said Ruderman consented to a final court judgment in which he was permanently barred from violating federal securities laws, and held liable for turning over nearly $32 million in “ill-gotten gains” and paying a $15 million civil penalty. Ruderman also agreed to turn over $750,000 in cash and 50 percent equity in a multi-million dollar condominium.

The commission also said it settled with Wieniewitz in July. According to the same statement, he agreed to a final court judgment holding him and his former company jointly liable for turning over $3.5 million and paying a $150,000 civil penalty.

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4 Ways To Prepare Your Cash Flow for Changing Business Cycles

By Mark Henricks

Having a healthy cash flow is a part of having a healthy business. Here are a few ways you can stay on top of your cash flow to ensure smooth transitions between business cycles.

Healthy cash flow is always critical, but it assumes even more importance when the economy is in flux.

After a decade of steady economic expansion, the possibility of a downturn should be considered in your business’ cash-flow plans, says James Cassel, co- founder and CEO of Miami investment banking firm Cassel Salpeter.

Questions about how long the expansion will continue, uncertainty as national elections loom and the effects of tariff wars are all affecting business owners’ moods, says Sonya Smith-Valentine, owner of financial consulting and training firm Financially Fierce in National Harbor, Maryland.

“I’ve noticed there’s a lot of unease, in general,” Smith-Valentine says.

“Everybody’s wondering what’s going to happen after the election. It’s making people hesitant.”

Not only should business owners start planning for a shift in the economic winds, they should start now, says Andy Cagnetta, CEO of Transworld Business Advisors, a Fort Lauderdale-based business broker.

“The speed at which things happen these days is much faster than it used to be,” he explains.

With that in mind, here are four ways to manage your business cash flow through the ups and downs.

  1. Watch your customers

From her experience riding out the last recession as head of a small law firm, Smith-Valentine suggests business owners worried about future business cycle shifts focus closely on their customers. As the 2008-2009 downturn built, she had to switch from mainly representing consumers suing credit bureaus to defending individuals against lawsuits filed by lenders.

“Luckily I saw the change coming,” she says.

By being sensitive to trends in her practice, she was able to switch emphasis to the part that was growing. And that let her maintain and even grow cash flow despite the downturn.

  1. Reduce your business

In addition to seeking new markets, Smith-Valentine worked to cut costs. She used an automated phone system instead of a human receptionist, reduced office supply orders and combed her spending for inefficiencies.

Having good timely data is crucial. One mistake we see is businesses letting that slip so they’re getting information 60 to 90 days old. That’s too late.

James Cassel, co-founder and CEO, Cassel Salpeter

“I was paying for access to two different programs when I only needed one,” she says. “I got rid of one of them.”

  1. Refine credit terms

Customer credit is another area cash flow managers examine to prepare for economic uncertainty.

Cassel stresses the importance of watching customers’ performance carefully, and taking action swiftly if a fast payer starts paying late. However, he says that rather than cutting off customers and driving them to rivals, it may be wiser to help customers through a rough patch so they remain with you.

  1. Keep cash and credit

It’s also important to maintain healthy cash reserves and, while business is good, consider obtaining a business credit card or expanding an existing credit line. It’s obviously easier to get credit approval when cash flow is strong than when a business is struggling to pay its bills.

Cagnetta’s firm maintains its line of credit even when cash flow and reserves are ample.

“We don’t have any money against it right now,” Cagnetta says. “But we keep it for a couple of reasons: To be strategic if we decide to buy something and in case of a rainy day so we have reserves.”

Other Cash-Flow Concerns

As Cagnetta noted, opportunity can arise in any economic environment. If a competitor struggles, it may offer the chance to acquire a rival at a bargain price. When competitors go under, surviving firms may be able to hire sought- after talent without buying the whole company, Cassel adds.

And in addition to scrutinizing receivables for slow payers, pre-recession may be an ideal time to encourage faster turnaround on invoices from healthy customers. Cassel suggests companies consider offering a discount for paying in 30 days instead of 60 days or otherwise accelerating payment.

“You have to be careful,” he says. “Some customers may get the discount and then slip back and still want the discount. So you have to stay on top of collections.”

Being careful is a central theme of how to manage cash flow during uncertain economic times. Growing too fast or taking on too much debt before a recession can hamstring a business. But being overly conservative and reining in growth when competitors are exploiting a continuing expansion can push a business to the back of the pack.

“It’s a balancing act,” Cassel says. “But you cannot bury your head in the sand like nothing’s going on.”

All told, information may be the most valuable commodity when preparing for a shift in economic fortunes. Even more than cash or credit, what distinguishes winners from also-rans when business cycles evolve could be having the data that will identify trends and suggest the optimal course of action, Cassel says.

“Having good timely data is crucial,” Cassel stresses. “One mistake we see is businesses letting that slip so they’re getting information 60 to 90 days old. That’s too late. You need to be managing your business daily, weekly and monthly, not quarterly.”

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WeWork’s Options for Raising Cash Are Narrowing Fast Ahead of Its IPO

September 11, 2019
By Erik Sherman

What if they threw an IPO and nobody came?

In a week marked by “will they are won’t they” speculation about an upcoming IPO, and leaks that the We Company is considering slashing its once $47 billion valuation to some $20 billion—or maybe less—questions surround the high flying company’s future prospects.

But what might be the more pressing issue is how the company plans to solve its ravenous cash flow needs—now.

WeWork needs cash

The need for an IPO or some alternative all comes down to WeWork’s need for cash. Money has been flying out the door. In the company’s amended S-1 filing with the Securities and Exchange Commission, We saw in the first six months of 2018 a loss from operations of $678 million on $774 million in revenue. By the same period in 2019, it was a $1.4 billion operations loss on $1.5 billion in revenue.

In theory, WeWork could make money, according to Barry Oxford, who covers real estate for D.A. Davidson. “WeWork’s office space in and of itself is cash flow positive,” he said, comparing the revenue and operating expenses of the spaces. Oxford does worry about how well the business model would work in a recession. “Can WeWork get to cash flow positive and have enough of these spaces up online and stabilized before a recession or does the recession hit them before they’re stabilized, causing a lot of disruption to their business model,” he said.

The company has aggressively tried to build out its presence and secure more regular revenue, gobbling up cash in the process.

“This company right now probably needs to raise money to be around in five years … based on what they disclosed in their registration statement,” said James Cassel, chairman and co-founder of investment bank Cassel Salpeter & Co. “Their business model is to lock into these 10-, 15-, 20-year [building] leases.” Doing so allows the company to spread expenses for building out its co-working spaces over time, making the expense manageable. But the constant expansion means a need for ready cash.

We’s cash flow isn’t enough to keep things going. In the first six months of 2019, the company showed a net positive cash flow increase of $844.7 million, but only because it received $3.4 billion in cash from financing. Without the infusion, the company would have seen a decrease of more than $2.5 billion.

As of June 30, 2019, We had cash and cash equivalents of just under $2.5 billion. In other words, without an infusion from financing of that size, We would have been out of money and, potentially, out of business.

We is spending so much on marketing, overhead, and capital expenses for new locations, it doesn’t have enough operating profits to cover the bills. To keep on its current course, the company absolutely needs enough extra money to see it through the next few years until—hopefully—business dynamics turn around in its favor.

How much is WeWork worth?

An IPO was an obvious choice, especially at the $47 billion valuation the company sought. Additionally the company had lined up a $6 billion credit line from a group of banks, contingent on a successful IPO, Bloomberg reported.

But WeWork’s image has taken a beating with guaranteed control and sweetheart deals for CEO Adam Neumann. Many investors and market watchers pored over the S-1 and balked.

There were reported talks of at least two valuation downgrades in an attempt to make the deal more palatable, possibly bringing the IPO down to as little as a third of its original size. However, major investor SoftBank Group would have had to take a $4 billion write down and a $5 billion loss on its Vision Fund investment vehicle, according to Bloomberg. That would be particularly problematic as SoftBank is trying to raise money for a second fund.

“The fact that [We is] even considering going out with a valuation of a third of the last round suggests that the additional infusion is important to them,” said Chester Spatt, a professor of finance at Carnegie Mellon University. “These losses are clearly putting pressure on them to find some sort of funding solution.”

WeWork’s Strategy

The circumstances raise the question of what else We can do to bring in the money it needs. One approach could be to change the business model and stop the current drive for growth. “Then they have the ability to [plan] and see what they need to do to be able to get their existing operations cash flow profitable,” Cassel said. But Neumann doesn’t seem likely to scale back.

Another possibility is going to debt markets to sell bonds, which may be harder than it sounds. Data from Bloomberg shows that a bond that WeWork had issued in 2018 with a date of 2025 had been trading a few percent above its face value since the company released its IPO filing. News of the potential IPO postponement caused the value to drop below face value by 2.5% before returning to face value at the end of Tuesday trading. As of midday Wednesday, the bond was down an additional 3.4%

“It means they won’t be able to borrow money [easily or cheaply] as a private company,” said Barrett Cohn, CEO of private market investment bank Scenic Advisement.

Or there could be a rescue, possibly by SoftBank, either through financing for a bridge period so the company could stay afloat or an outright takeover. That would take billions and would seem unlikely to appeal to SoftBank, which would rather start its new fund than prop up the existing one.

The other options don’t look good. Or, as Cohn said, “They need to IPO.” Whether investors will show up is another matter entirely.

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