Our Merger & Acquisition practice consists of four key management staff, whose combined expertise provide privately-held businesses with a broad continuum of accounting, tax and business advisory services - not just for initial mergers and / or acquisitions but also to support post-transaction activities.  

Unbundled Functions

We offer a fast-track route for privately-held businesses to go public: REVERSE MERGER.  This is in contrast to the normal process where the two functions of going public and raising capital are combined into what is commonly referred to as an Initial Public Offering or IPO.  Here, in a Reverse Merger these two functions are unbundled, enabling private businesses to go public without the need to raise additional capital at the same time.  This unbundling approach greatly simplifies the process of getting the equity of what was a privately-held business to be traded on a public exchange.

To further explain this approach, a privately-held business (our client presumably) merges with a suitably-qualified business that is already publicly-listed but without substantial assets (the latter is sometimes referred to as a “shell” corporation).  The private business obtains a controlling interest of the public company by acquiring a large volume of shares (about 90%). 

The professional fees to be incurred in acquiring a shell corporation are in the range about $80,000.00 to $100,000.00.  The de facto purchase of a shell corporation would require additional substantial funding. The followings are some examples of suitable candidates for a shell corporation. 

Types of Shells

• Failed public company: potential for unknown liabilities, lawsuits and dissatisfied shareholders.
• Non-trading Non-reporting: no symbol, may or may not have been a reporting company, least attractive, valued at $10,000 - $25,000.
• Reporting Non-trading: 12G companies, filed a blank 10K with no business, no symbol, usually one shareholder, valued at $10,000 - $15,000.
• Gray Sheets: inactive symbol, no active market maker, may or may not be reporting, reporting company subject to audit, valued at $50,000 - $75,000.
•  Pink Sheets:

a)      Past reporting: delinquent filer, no longer current with its SEC filings, may avoid SEC review if reporting is brought current;

b)      Never reporting: must file a registration statement to become a reporting company, will normally require a SEC review;

c)      “Piggy Back” exemption: may qualify if the company becomes current and compliant with the SEC in its reporting requirement;

d)      Designated Pink Sheet: direct trading Pink Sheet, does not have a 15c211 on file with the NASD, no NASD symbol, value is questionable.

• Trading and reporting OTC/BB: reporting with the SEC, must file annual 10Ks with an audit, 10Qs and 8Ks.  Can be a 15D reporting under ’33 Act, or 12G reporting under the ’34 Act.  Valued at $400,000 - $800,000, with equity dilution of 1% to 5% post merger.

After gaining the shell, the following requirements must be met, in order to maintain or regain a listing on NASDAQ:

• Minimum 300 shareholders for admission to NASDAQ Small-Cap Market
•  Initial listing application and listing agreement
• Satisfy all initial inclusion criteria and pay all fees (application, entry and annual)
•  Initial application should be submitted 6 – 8 weeks prior to expected consummation of the merger transaction
•  Appeal staff determination immediately after submission of initial app
•  File audited financial statements within days of closing the transaction

In addition, there are Security and Exchange (SEC) matters to comply with:

• Regular quarterly and annual audited reports (e.g. 10K filing)
• Disclosure of all materially important events and development through special filings
•  Preparation and dissemination of press releases
• Conform to stringent accounting standards
• No profitability rule

 Despite some stringent requirements, the benefits are substantial:

• Greater access to capital markets
• Increase company’s visibility in the investment community
• Quicker, easier and cheaper than IPO
• May utilize its stocks to make acquisitions
•  Increased liquidity of the ownership shares of the company
• Higher share prices and thus higher company valuation
• Presents an attractive investment opportunity to a wider range of new investors
• Ability to use stock incentive plans to attract and retain key employees
• Retirement strategy for business owners
• Lower risk than IPO – an IPO may be withdrawn due to an unstable market condition even after most of the up-front costs have been expended
• Does not require a relatively long and stable earning history
• Less dilution of ownership control
• Additional capital can be used to finance anything, from product development to working capital needs
• Possible income tax shelter: loss carried over so future income is sheltered from tax 

Of course, there are potential drawbacks:

•  May ends up with small market capitalizations and single digit stock prices
•  Heavy costs to meet various filing and regulatory requirements
• Subsequent private placements may be more difficult due to low public valuation

Yet, there are many examples of successful reverse mergers:

•  In 1970s Ted Turner reverse merged with Rice Broadcasting which grew into Turner Broadcasting Systems
•  In the 1950s Arman Hammer invested in a shell which grew into Occidental Petroleum
• And many more  (Annually, around 500 reverse mergers take place in the US).

To sum it up, an existing privately-held business intending to go public should have the following background:

•  It should have annual sales of $20 million and a decent earning track record. 
•  It is prepare to give up 10 – 20% of equity
• It can get the approval of its Board of Directors, and is able to provide audited financial statements within the required time.
•  It does not need capital quickly
• It has the potential to experience enough growth to develop into a substantial public company.

 A Brief Look at the Preparatory Work Involved in Going Public in the USA

 The broad stages:

Stage 1	2 years of Financial Statements	Audited and certified by an accounting firm.
	Profile of the Company	Background information
	Latest Bank Statements for 3 months
Stage 2	Business Plan, Verification of Deposits
Stage 3	3-year Projections
	Election of Board of Directors

 A sampling of general documents we would ask for:

Copy of Articles of Incorporation and Bylaws. Board minutes for the current fiscal year. Copy of insurance policies, if any. Copy of debt agreements, if any. Copy of contracts, lease agreements, purchase agreements, licensing agreements, if any. Copy of related party agreements, if any. Copy of new stock option, stock purchase or other equity plans, if any. Information relating to disclosures required by SFAS 123 – Stock Based Compensation, if any. Copy of litigation, if any. Copy of government agency assessments, audit finding or notices of deficiency, if any. Copy of all development and maintenance / licensing agreements. Copy of amendments/changes to existing agreements made during last year end. Procedure memo outlining flow of transactions.

A sampling of accounting documents we would ask for:

Working trial balance as of year-end. General ledger balances as of year-end. Bank accounts reconciled to the general ledger for all cash accounts. Cash equivalent detail reconciled to the general ledger. Accounts receivable aging detail reconciled to the general ledger. List of uncollectible accounts receivable as of year-end, and detail of accounts written off during the period under audit. Inventory detail by natural categories and final priced inventory  -  reconciled to the general ledger. Final inventories to include material, labor and overhead. Details of overhead pool including allocations of expenses from other departments such as G&A. Other assets, deposits and investments detail reconciled to the general ledger. Property and equipment summary of beginning asset balances by category, additions and disposal by category and ending balances by category reconciled to the general ledger. (See attached sample format) Detail list of additions and disposals. Depreciation schedules with beginning accumulated depreciation, depreciation for the year reconciled to the general ledger and ending accumulated depreciation balance reconciled to the general ledger. Detail of gain/loss on disposals. Accounts payable aging detail reconciled to the general ledger. Accrued expenses detail reconciled to the general ledger. Accrued compensation. Accrued commissions. Accrued vacation. Any other accrued account. Debt (notes payable, leases, etc.) detail reconciled to the general ledger. Copy of amortization schedules. Summary of compliance with financial covenants required under the agreements. List of shareholders and stock each owns. Reconciliation of payroll per payroll tax returns to payroll expense per general ledger and payroll service for the year. Copy of payroll tax returns for all quarters. Copy of summary page from YTD payroll registers. Analysis of revenues/deferred revenues by customer/contract including contract type, start/complete dates. For customers with sales  greater than 10% of total sales for the year: List of customers and sales amount for the year. List of A/R due from customer at the end of the year. For vendors with purchases greater  than 10% of total purchases for the year: List of vendors and purchases amount for the year. List of accounts payable to vendor at end of the year. Copy of G/L YTD account  activity for the following accounts: Legal and accounting Bad debt Interest Payroll Schedule of future payments for operating leases. Schedule of future payments for capital leases.