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REVERSE TAKEOVERS

Grand Avenue Capital Partners LLC Member FINRA SIPC Pasadena California

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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 CAPITAL GREATER VALUATION IN RAISING CAPITAL

Premium for publicly-traded companies Generally 50% to 100% For early stage/emerging growth companies can be much higher

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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.

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PRIVATE INVESTMENTS IN PUBLIC ENTITY MAJOR CAPITAL SOURCE FOR SMALL PUBLIC COMPANIES

PIPEs Private placement/commitment to register shares Faster, easier than IPO or secondary 6

MAJOR CAPITAL SOURCE FOR SMALL PUBLIC COMPANIES Highly flexible Negotiate protections for investors Can be dangerous for issuers if not structured properly

 Resets  Floating Convertibles  Toxic 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’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

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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

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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 companies 419 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

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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

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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

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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

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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

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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

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