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Going Public Through a Reverse Merger

OPPORTUNITY 
Raising capital is a constant concern for many businesses, particularly those in the pharmaceutical industry. Recently, the management of a private pharmaceutical company was looking to raise money to expand their company's intellectual property. When the decision was made to take the company public, management came to Wolf for help. We had provided audit services to them in the past, so an established working relationship was already in place. Since Wolf works with both private and public companies, we were in a unique position to offer our services throughout the company's lifespan. At this stage, the company had an FDA approved product and just a few owners. To increase its operating budget to allow for development into the next phase of clinical trials and to obtain FDA approval for other new drug candidates, additional funds were needed. The company decided to undertake a private placement, which was contingent upon going public. While there are many advantages to a traditional Initial Public Offering (IPO), there were factors that made this a poor choice for this particular company. An IPO often takes between six months and a year and comes at a much greater financial cost. In addition, IPOs often require that the private company owners give up a larger share of ownership in their company compared to other public financing options.

SOLUTION
After the company made the decision to pursue a reverse merger rather than a traditional IPO, Wolf provided guidance to make the process as efficient as possible. A reverse merger can take a number of different forms but frequently involves the acquisition of a private operating company by a public shell, or non-operating company, immediately followed by a merger of the two entities. In a reverse merger, the legal form of the transaction and the accounting for the transaction are different.  Legally, the public shell company is the surviving entity post-merger. However, for accounting purposes it is the private operating company whose financial results, balances and activities carry forward post-merger. In addition, although the private operating company is “acquired” by the public shell company, the owners of the private operating company end up with a majority ownership in the public company post-merger. Despite the various advantages of a reverse merger, this process can be difficult and requires in-depth knowledge of the specific financial reporting and SEC filing requirements in order to avoid potential pitfalls.

In contrast to a traditional IPO, reverse mergers can be completed in just a few weeks. This means that there is less time invested, less capital needed to complete the transaction, and a larger share of ownership in the new company can be retained by the original owners.

RESULT 
Wolf was the auditor of the company when it was private, and our existing relationship with management and historical knowledge of the company’s finances allowed us to dramatically cut our turnaround times. From the time the decision was made to go public – to the completion of the reverse merger – the process took one month. This included all activities required to produce a super 8-K, providing required disclosures, cap tables, and pro forma financial statements.

Wolf is a PCAOB registered and inspected firm, and we are qualified to practice before the SEC and extend our industry expertise to both private and public company clients. We were there from this company's first audit to its decision to go public and beyond.

Wolf’s significant experience with pharmaceutical and life sciences companies combined with our deep SEC expertise, including reverse mergers, makes us the perfect partner for your company if a public offering is in your future.