Reverse Takeovers

1. Reverse Takeovers Grand Avenue Capital Partners LLC Member FINRA SIPC Pasadena California

2. Reverse Mergers Reasons for increased activity in reverse mergers: • Alternative strategy for going public • Greater access to capital • Greater valuations in raising capital • Sarbanes-Oxley • Chinese Companies

3. Greater Access to CapitalGreater Valuation in Raising Capital • Premium for publicly-traded companies • Generally 50% to 100% • For early stage/emerging growth companies can be much higher

4. Greater Access to Capital Capital Markets Today • Fewer deals and lower valuations in venture capital, private equity, M + A transactions • M & A activity • Turmoil in credit markets

5. Funding Gap solution for Emerging Growth Companies • For Companies • Revenues from $0 to $100 million • Limited history of earnings • High growth potential • Not satisfied with valuations in private equity and M & A markets. • Need less than $80 million in an IPO. • Chinese companies seeking to raise capital in the US.

6. Private Investments in Public EntityMajor Capital Source forSmall Public Companies • PIPEs • Private placement/commitment to register shares • Faster, easier than IPO or secondary

7. Major Capital Source forSmall Public Companies • Highly flexible • Negotiate protections for investors • Can be dangerous for issuers if not structured properly • Resets • Floating Convertibles • Toxic Convertibles • “Death Spirals”

8. Advantages of Reverse Takeovers • Liquidity for prior investors • Equity incentives for key employees • Use of equity in making acquisitions • Industry roll-ups and consolidations • Arbitrage between cost of acquiring private companies and valuation of raising capital for public company • Faster than IPO or direct registration

9. History of the Shell RTO • Post - 1960’s • Operating companies • Blank check public offerings • 1992 – SEC Rule 419 • Reduced supply of shells • Started to clean-up the shell game • The Private Shell Strategy

10. History of the Shell RTO • 1999 • Bulletin Board requires SEC reporting • NASD imposes unwritten requirements for Bulletin Board trading • Wulf and Worm letters • NASD Notice to Members 00-49 • NASD investigates some Bulletin Board applicants • Today non-BB shells have risks of not getting on BB without SB-2

11. Shell Market Today • Large demand for Shells • Much smaller supply of good shells, higher prices • Many private companies taking risks with non-Bulletin Board or “unclean” shells

12. Where Do Shells Come From? • Previous operating companies • 419 shells • “Manufactured shells” • Formed as a “blank check” and obtained shareholders through public offering, private offering or “gifting” shares

13. How to Find a Shell • Shell websites • Shell brokers • Shell owners

14. Purchasing a Shell • “Purchasing” a shell v. doing a reverse merger • Most owners of clean Bulletin Board shells are “deal driven” • They are not “selling” a shell • Non-trading shells and “stalking horse” shells are sometimes for sale • Non-clean shells are for sale

15. Reverse Merger Basic Terms • Cash and Equity • Amount of cash and equity depends on perceived value of private company • Selling the value of the private company is important • Amount of cash also goes up if private company wants more equity • High percentage and low percentage deals • How much equity • How much float

16. Action Plan for RTO • Determine whether Reverse Takeover is best course • Consider disadvantages of going public • Consider alternatives to RTO • Initial public trading through SB-2 • 4 to 6 months • Can the private company do a RTO • Too many shareholders • Is private company prepared to go public

17. Action Plan for RTO • Prepare Private Company • Enhance value • Prepare “pitch sheet” and business plan • Get prepared to go public • Complete management team • Retain attorneys • Retain auditors • Retain advisors for RTO going public

18. Action Plan for RTO Corporate clean-up • Disclosures • Contracts • Disputes • Capital Structure • Balance Sheet Retain IR (investor relations) firm

19. Action Plan for RTO • Determine type of RTO terms private company wants • High percentage • Low percentage • Cash v. equity • Be prepared to move fast • Letter of Intent • Deposit • Due diligence team in place • Be prepared to be public within weeks

20. Negotiating the RTO • Initial contacts • Initial due diligence • Letter of intent • Deposit • Definitive agreement

21. Negotiating the RTO • Complete due diligence • Close • Change Board of Directors • Change Name • New CUSIP/Symbol • File 8-K • Complete audit of private company • File 8-K/A with audited financial statements

22. Initial Contacts with Shell Owner/Broker and Initial Due Diligence • Do they control this shell • What terms do they want • Cash/equity/deposits • Background of shell owners/brokers • What are their time requirements

23. Initial Contacts with Shell Owner/Broker and Initial Due Diligence • Initial due diligence • Due diligence package from shell • Review SEC filings • Trading status • BB • Pink sheets • Non-trading • NASDAQ • AMEX

24. Initial Contacts with Shell Owner/Broker and Initial Due Diligence SEC reporting status • Reporting/non-reporting • Late or delinquent filings • 12(g) or 15(d) Percent of stock/float available

25. Initial Contacts with Shell Owner/Broker and Initial Due Diligence Regulatory Background • How long trading • How long reporting • How start trading • Public offering • Manufactured • Stalking horse • Bankruptcy

26. Initial Due Diligence • Liabilities from past • How long dormant • Nature of operations • Possible SEC, NASD problems

27. Initial Due Diligence Capital Structure • Number of shares outstanding • Warrants, options, convertibles • Number of shares authorized • Number of shares in float • Number of shareholders • Number of shareholders in float

28. Initial Due Diligence Ownership/Control History • Multiple prior owners/control persons • Background of prior owners/control persons • Prior RTOs

29. Terms of RTO • Merger • Reverse triangular merger • Exchange offer • Cash for control • Cash for float

30. Terms of RTO • Equity exchange ratio • Hold back, scheduling agreements • Assets/liabilities • Representation and warranties • Investment capital at closing of RTO

31. SEC Reporting Requirements • Current rules Form 8-K within 4 business days • Terms of RTO agreement • Brief description of company • ID of new control persons Amended 8-K within 71 days after 8-K • Audited financial statements

32. SEC Reporting Requirements • Proposed Rules • Form 8-K within 4 business days with Form 10 level of disclosures including audited financial statements • Minimum requirements • More extensive disclosures recommended

33. Disclosure and Marketing Plan • Investor Relations (IR) Firms • Budget for IR • Importance of credibility, meeting expectations

34. Major Reasons for Failure • Failure to protect against illegal and abusive practices after the reverse merger • Failure to adequately conduct due diligence • Poor structuring of finished public company • Failure to adequately prepare to be publicly traded

35. Major Reasons for Failure • Failure to prepare and execute plan for managing the market • Failure to prepare and execute disclosure program • Poor selection of professionals and advisors