Sears Holdings Corp. (fka SHLDQ)

[StockRoomBully]

M&A NOLS GAMEPLAN GOING PUBLIC*

"Rules limiting NOL "trafficking": Obviously, the IRS frowns upon such activity, so there are a few things to consider when investing in NOL shells. Section 382 of the Internal Revenue Code states that if a "change in ownership" occurs the NOL will subject to annual limitations. I won't discuss all of the details of the annual limitations as that would get complicated, but the short story is the limitations would significantly reduce the NOL value. A change in ownership occurs if one or more "5% shareholders" increase their ownership in the company by more than 50 percentage points over a three-year testing period. For instance, if a 10% shareholder increased his position in the Company to 70% (a 60 percentage point increase), the NOL would be subject to annual limitations.

Monetizing NOL shells: There are two main ways to win with NOL shells. The first is the most obvious; acquire a business with taxable income to offset your NOLs. The second is being acquired by another (private) company, in other words, a reverse merger. The two main reasons to go public through a reverse merger are that it is faster and cheaper than a traditional IPO. Both of these transactions should sufficiently compensate NOL shell shareholders.

Types of NOL shells: I like to classify NOL shells into several different categories as these companies generally evolve through three stages. The first stage is what I like to call the "SPAC" phase. Special Purpose Acquisition Companies (SPACs) essentially act as public PE firms to allow individual investors to gain exposure to private equity like transactions. SPACs raise capital through a combination of common shares and rights / units / warrants. The capital is utilized to acquire "undervalued" public companies -which is exactly what NOL shells are trying to do. A perfect example of this type of NOL shell is Myrexis (OTC:MYRX).

The third stage (skipping out of order here for a second) is what I like to call the "mature phase". These former NOL shells have acquired a business (or multiple businesses) and are essentially generating strong cash flow yields without paying taxes! A good example of this would be AMEN Properties (OTCPK:AMEN) (which I will eventually write about).

The second stage is something in between the SPAC phase and the mature phase; I call it the "developing NOL". This is a NOL shell that has developed a strategy for monetizing its NOLs, but is still in the process of implementing on its strategy. An example of a second stage NOL shell would be SWK Holdings (OTCQB:SWKH), which I have detailed in several posts. A common method of monetizing NOLs is acquiring drug royalties. These royalties are generally high margin and provide cash flows over an extended period of time, perfect for monetizing NOL shells, which is essentially what SWKH is doing.

Benefits and risks of NOL shells: There are three main reasons why I like NOL shells. The first reason is they are generally uncorrelated with the market. With overall equity valuations artificially inflated by central bank money printing, it would make sense to own assets that are uncorrelated with the broader market in the event of a correction.

The second is that these companies are typically overlooked by most investors because the deferred tax assets associated with the NOLs are almost always fully reserved against with a valuation allowance. In other words, these assets are not present on the balance sheet. The final reason is that these types of investment typically do not take a long time to analyze and research. The process is very quick, simple, and relatively easy for the potential return you can hope to realize.

Investing in NOLs can also be risky, particularly if you're not the one in control of the Company's acquisition search. Most of the risks I will talk about will be in cases where you are not in control of the NOL shell. In these cases, you have to be very careful who you're in bed with.


https://seekingalpha.com/article/2541945-the-importance-of-nol-shells