REVERSE TAKEOVERS

Grand Avenue Capital Partners LLCMember FINRA SIPC

Pasadena California

1

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

2

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

3

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

4

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.

5

PRIVATE INVESTMENTS IN PUBLIC ENTITYMAJOR CAPITAL SOURCE FORSMALL PUBLIC COMPANIES

PIPEs

Private placement/commitment to register shares

Faster, easier than IPO or secondary

6

MAJOR CAPITAL SOURCE FORSMALL PUBLIC COMPANIES

Highly flexibleNegotiate protections for investorsCan be dangerous for issuers if not structured properly

ResetsFloating ConvertiblesToxic Convertibles “Death Spirals”

7

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

8

HISTORY OF THE SHELL RTO

Post - 1960’sOperating companies

Blank check public offerings1992 – SEC Rule 419

Reduced supply of shells Started to clean-up the shell game

The Private Shell Strategy

9

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

10

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

11

WHERE DO SHELLS COME FROM?

Previous operating companies419 shells“Manufactured shells”

Formed as a “blank check” and obtained shareholders through public offering, private offering or “gifting” shares

12

HOW TO FIND A SHELL

Shell websites

Shell brokers

Shell owners

13

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

14

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

15

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

16

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

17

ACTION PLAN FOR RTO

Corporate clean-up Disclosures Contracts Disputes Capital Structure Balance Sheet

Retain IR (investor relations) firm

18

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

19

NEGOTIATING THE RTO

Initial contacts

Initial due diligence

Letter of intent

Deposit

Definitive agreement

20

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

21

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

22

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

23

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

24

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

25

INITIAL DUE DILIGENCE

Liabilities from past

How long dormant Nature of operations Possible SEC, NASD problems

26

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

27

INITIAL DUE DILIGENCE

Ownership/Control History

Multiple prior owners/control persons Background of prior owners/control persons Prior RTOs

28

TERMS OF RTO

Merger

Reverse triangular merger

Exchange offer

Cash for control

Cash for float

29

TERMS OF RTO

Equity exchange ratio

Hold back, scheduling agreements

Assets/liabilities

Representation and warranties

Investment capital at closing of RTO

30

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

31

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

32

DISCLOSURE AND MARKETING PLAN

Investor Relations (IR) Firms

Budget for IR

Importance of credibility, meeting expectations

33

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

34

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

35