Kemiao Garment Hldg Group (KMGH)

[mc67]

** What makes an attractive Shell for Reverse Merger:

Posted Originally by Stock_Lobster on April 14, 2007, here is a complete repost:
http://www.investorshub.com/boards/read_msg.asp?message_id=18776962

"Here's what I have been looking for when taking a position in a shell.

Fwiw, I've been backing off most plays posted heavily on Ihub. They're good for momentum runs, but so far, it doesn't seem clear that shells with a big following and hundreds of posts are any closer to a RM than one none of us have heard of before...a few times perhaps, but not to the degree investors might think.

Instead, I've decided to put myself in the state of mind of someone looking to purchase a shell. In this case there are a couple of things I think I'd be looking for:

1) Filing OTCBB dormant shell. This, obviously, is the holy grail. A Jr NASD listing right off the bat. However, these are far less common than pinksheet shells, and trade at a premium.

After watching EXEG and GTRY, I endorse Atout's decision to only take positions in reporting OTCBB shells, as their very scarcity makes them more likely to RM sooner rather than later. However, there is a PPS premium associated, and some penny traders shy away from that cost.

2) Share structure and low OS: This seems to be broad category, but when I get closer to the subject, I get a little pickier.

A 30MM OS may be small for a stock we trade in pennies, but not for a shell, imho. From what I've seen, some of the chinese firms buying shells (and those seem to be the main buyers right now) seem to favor a very small OS. Perhaps that's because they have aspirations to higher exchanges, but it's what I've noticed. So, imo, a 30MM OS stock still isn't immune from a possible post RM reverse split, which is the biggest threat to any shell trader.

Therefore, I'm focusing on shells with an OS of 10MM or less. Under 5MM ideal, imho. Very small could be good, but only if the shares can be acquired through a tender offer.

Of course too small an OS, and there is no liquidity. I imagine this kind of OS would force a FS post RM. It might also be seen by some as a disadvantage. From what I've read, there are some RM attorneys who argue that the attraction of purchasing a shell includes acquiring an exisiting shareholder base. So, there is an ideal OS which includes an existing shareholder base, but not so large to risk a reverse split.

But bottom line, it's all about the shell's market cap.

3) Large insider holdings. As a shell buyer, I wouldn't want to be chasing shares in the open market. I would want to submit a tender offer and acquire the majority interest in a company with one transaction. So a company where insiders are holding 60% or more of the OS seems more attractive, imo.

4) Clean. This is an obvious one. Up to date on filings and no lingering loose ends. So many of the stocks we trade are post bankruptcy, but not all. A few went dormant before they had to declare chapter 11 or 7. Again, I look at the history of filings, as I would a credit report. A few companies never had a late filing, and chose to file a 15-12G before they were forced out of business. They did not persist in a state of denial about their business prospects, but rather winterized the house and locked the doors before they were evicted, so to speak. As a result, their balance sheets are pretty favorable, and they didn't dilute heavily into the last desperate year, attempting to stave off the inevitable. There are also no toxic pipe financers in their background, waiting to create trouble. When you check their state's SOS, they are not revoked, but current and dormant and when I doasearch on the CEO and directors, I don't find scandals and allegations of corruption. Ideally, the company was never a previous RM, but a 'virgin shell..but that's maybe asking too much.

Sadly, a few owners I've spoken to want to market their shells, but they were left broke after the bankruptcy, and they don't have the funds to catch up with the filings. They are delinquent in corporate taxes, and with each year, their situation deteriorates. This is another reason to locate companies who went dormant before their back was to the wall. It takes money to clean up the house to attract buyers.

Companies that fit this criteria are my new favorites, when I can find them. I'm not saying the other shells don't run, because they do. I'm just establishing a new standard for my own buying.

5) 15-12G filings. Alot of people jump on a stock the minute they file a 15-12G, but why? In my mind, those companies are just begining the process of shopping their shell, if they're even thinking in that direction.

Instead, I'm looking at 15-12G filers from a few years back. The wheels of negotiation grind very slowly, so I imagine a shell could be in play for several years before the final paperwork is filed.

6) Accessible owners. I need to know that the board of directors, as last identified in filings, is still accessible by telephone or mail. After all, if I can't reach them, how could an interesed buyer contact them? Too mystery stocks, which I call "zombies" floating around the market.

7) Interest or part ownership by a recognized RM attorney. Obviously, this is a biggie. A 13-G filed by a well known RM partner is a very good sign that the shell has been vetted by someone who knows the business, and is now an interested party trying to shop it.

However, a canny group of owners, who include attorneys, can also be good. It's not always about what is the absolute best shell, but often about the desire and effort to market the shell. I have to imagine that a shell with problems which is owned by an aggressive owner who is often a participant at PIPE financing events and other places where buyers and sellers meet, stands a much better chance of being acquired than one owned by clean credit boyscouts in Maine who never let their desire to sell be known.

Finally, before I forget, there's the issue of trading activity in a shell stock before a RM partner is found. There seem to be two points of view on this.

Some RM attorneys recommend to their clients that there be little to no trading in their target shell before a RM is proposed. Their philosophy is that the activity level and PPS of the stock should establish itself slowly, post merger, through a growing corporate IR campaign.

But, on the other hand, I've had the opportunity to speak at some length with a PIPE financer/RM attorney, who candidly told me that sometimes a firm will deliberately 'run' a shell they own, to help create interest in the shell. I guess this would fall into the category of those who feel that an existing shareholder base makes a shell more attractive. When I look at the charts of famous RMs like LFZA or PKTO, there were regular spurts of activity for months, sometimes years, prior to the merger. So, that definitely adds weight to the argument that we should be tracking shells that seem to have regular runs and spurts of activity and accumulation.

He also mentioned that the owners or attorneys will also use this activity to help raise some funds to apply towards merger costs.

Is there dilution going on during these runs? We didn't get that far, but as I've watched many of these shells trade, a few seem to have alot of sellers show up suddenly. It might well be pre bankruptcy shareholders taking advantage of the liquidity to get out of their stuckholder positions, or it could be dilution. This might be a reason to favor shells with a small AS, preferably close to maxed out. I'll admit I've grown a little cynical about this whole process, of course.

Naturally, we might be getting a skewed impression on Ihub, as a couple of the shells which have been actively marketed here, may have had too many interested parties working overtime to make the shell sexy, imho. We don't really get to see the clean 'boyscout' owned shells RM too often, except when they show up on our scanners +5000% overnight.

Of course, I'm not knocking big board shell plays, as that is part of the reality of this market. But for some of those stocks, the best part of the run generally seems to take place before the RM is actually consummated. Too many suffer dilution and/or a RS as soon as the exchange of owners takes place, whereas less publicized plays like EXEG have climbed steadily, 400% or more, post RM. WITM, which had a small RS post merger, is now +300% in a little more than a month, but most traders overlooked it. GTRY is holding 100% post announcement gains, and seems set for a steady climb as well.

So I guess it all depends on whether a trader is interested in a true RM play, or a low float/momentum play to be traded mostly, not held. It's not always obvious at first glance which is which.