Why a Reverse Merger you ask?
In a nutshell, here is the Cliff Notes version:
Many non-public, private companies desire to gain a public listing, where to organically grow their business, they can utilize the share price as a currency to capture seed capital, giving the company a much needed lifeline to money, that would be impossible to procure under normal circumstances. By becoming a publicly traded entity, the company can leverage their price per share as a barter to get the money. To many of the world's businesses this endeavor, to go, "Public," is cost prohibitive in today's markets. When a company, take for example Facebook, wanted to go public, they solicited their prospective listing to many of the big name Wall Street institutions in an effort to gauge investor appetite to the company and what the overall sentiment was in so far as the company going through an Initial Public Offering, (IPO). Once the company decided on which institution was worthy of their business they went ahead and proceeded with the IPO, and thus, FB became a publicly traded company and garnered hundreds of millions of dollars in the process, as did the wall Street institution that enabled the IPO. The latter part of that sentence is the cost prohibitiveness I referred to earlier. FB had to pay millions of dollars to go public. For FB and companies of its kind, it is pocket change, to the mom and pop hardware store launching multiple stores contemporaneously, it is way out of reach, unattainable so to speak.
So what is a company with a Budweiser budget to do when it desires to go public and access the financial markets, and become the next BIG thing? They reverse merge into an already pre-established public entity, or shell, thus negating the millions of dollars needed up front to list, let alone meet the listing requirements necessary to do so, (that is a topic for another time). Currently a "Clean," shell can be purchased for approximately $300,000. Clean is the operative word here. Clean means no debt associated with the company, no pending derogatory information from a federally governed agency like the SEC, or other anchors tied to the transfer of the shell from one corporation to another. Our GLGT shell was being shopped around for $45,000, a significant discount to the aforementioned clean shells fetching $300,000. Reason is, that was a condition of sale stipulated to the purchaser of the shell, what we would call in the housing market a "Handyman special," so to speak. You get to go public with much less out of pocket, the difference here between $300,000 and $45,000 or for the mathematically challenged a cost savings of $255,000. The only caveat here is that there is approximately $835,000 in debt which the purchaser of the GLGT has to carry over to their business, upon the closing of this transaction. So right about now, you are asking well that is a bad deal for the company merging into GLGT, why not just spend the $300,000 and be done with it?
The answer and quite frankly what makes this situation so palatable and unique, is that the company attempting to consummate this transaction is anticipating approximately $20 million dollars a year in revenue within the corporation's first two fiscal years. But, they do not have the extra $255,000 to outlay right now, and they are confident that they will be able to generate enough income within an acceptable timeframe to the debt holders' plan, or in this case, within the first 2 years, that they can comfortably pay that money back. The aforementioned lends itself to huge credibility in the penny market world for varying reasons, but here are a few of my favorites:
1) To outlay the additional monies at this time, would have displaced the corporation's immediate future plans and made this a harder burden with which to proceed.
2) The debt holders who own the rights to this shell have to approve of the company's business plan to sign off on the deal as a condition to the sale. This can most easily be explained as when moving into a condominium, the board of owners have to meet with the prospective buyers and accept them before signing off on the purchase agreement.
3) In the real world, when someone buys a house, it would be great to pay cash and take out no mortgage, but that is just idealistic in today's society, most people put down the minimum necessary to qualify for the mortgage and save the extra monies toward re painting, landscaping, moving, furniture etc... When applying this metric, it is easier to understand why a company would agree to inherit an extra $575,000 in debt, for the purposes of getting this deal done. When an individual takes out a mortgage, say 30 years for this example, the price they paid for the house is $250,000, when protracted over a 30 year mortgage, they actually paid closer to a $1,000,000 for that abode.
So to recap: A reverse merger is contemplated for the purposes of going public, on the cheap, so to say. The purpose for going public is to take your business to the next level, which often times, requires more capital.
As it relates to our little GLGT: The acquirer, if all the DD here is correct, which I believe it is, is an aviation related entity, or as many as 3 aviation related entities, all looking to funnel into GLGT and go public. The management of same in doing so, has already demonstrated a responsible proclivity to same by hoarding their cash initially, to grow the business, all the while knowing that they have the business to succeed. The aforementioned is also relevant in so far as a third entity has pre-approved their business plan, that approval coming from the debt holders', when taken into the spectrum that they will likely not dilute anytime soon, because their is a 2 year plan here, with a legitimate business behind it. This is why many of us here feel that with the share structure on GLGT being as low as it is, upon completion of this proposed transaction, you are looking at MULTIPLE PENNIES.
There are many ins and outs and other components involved in these transactions and I am
oversimplifying this process to a degree, but fundamentally that is why a reverse merger would be consummated.
Hope that helped.
Happy Trading,
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