In August, Mount Tam Biotechnologies merged with a defunct cigar company in order to attain public trading for its stock. It was an odd coupling. The biotech startup needs money to fund research. Cigar company Tabacalera Ysidron failed in its plan to distribute Nicaraguan cigars.
Using a transaction called a reverse merger, the private company Mount Tam Biotechnologies bought the majority of shares of public shell company Tabacalera Ysidron then changed its name, gaining access to public markets.
Tabacalera Ysidron became a shell company because its business failed. According to a February 2014 letter from the Securities and Exchange Commission, in 2012, Tabacalera Ysidron issued 5 million shares of stock to founder Steven Ysidron for $500 — a hundredth of a penny per share. The company, based in Raleigh, North Carolina and incorporated in Nevada in 2011, issued 105 million shares at that price, as declared in its articles of incorporation, for a total of $10,500. In 2013, the company issued 1.7 million shares for $167,650 at 10 cents a share.
Tabacalera had thin capitalization. The SEC found numerous discrepancies in Tabacalera’s disclosures of its operations, cited in its letter to Ramon Tejeda, CEO and sole director. “We note your disclosure that the company currently has $23,623 cash on hand, and that you expect costs of SEC and corporate governance compliance to be approximately $80,000 per year. Please revise to disclose how you plan on meeting these requirements if you fail to generate revenues from your business,” the SEC said.
In another July 2014 letter, SEC staff said, “Please clarify what business you are in, including whether you are a distributor or a manufacturer” of cigars.
Tabacalera Ysidron struggled to last even three years in business, acknowledging in its disclosure that “net revenues are not sufficient to fund operating expenses.”
TRICKY BUSINESS OPTIONS
Biotech startups face tricky business choices. The designer molecules they invent and test hold huge potential to save human lives and curb suffering caused by diseases while reaping millions or billions in revenue. But the route from lab research to marketable drug is treacherously long and expensive. It can take a decade to wade through testing on mice to clinical trials that establish safety and efficacy for people to the satisfaction of the Food and Drug Administration. Meanwhile, a company must pay millions of dollars in salaries to scientists, management and other staff, facilities costs, overhead, expenses for clinical trials and administration.
Such fledgling companies might find seed funding from venture capitalists — either individuals or investment funds — but these profit-hungry investors expect major control over the companies into which they plunk money. Outside investors also might not want to wait a decade to realize a return, and further funding rounds might require turning even larger chunks of the company over to investors.
To raise capital, a startup can borrow money and then carry that liability. It can do an initial public offering, which can take a year and cost $2 million, and be subject to timing risks of the public stock markets.
Reverse mergers offer a quick route to public stock trading, but they carry different risks. Tabacalera had unpaid bills of nearly $100,000 that surfaced after the reverse merger. Sometimes investors in a shell company dump their shares soon after the merger. There can be tax liabilities, financial liabilities and legal risks, such as customers that sue the shell company after the reverse merger. Problems of the defunct shell company become the problems of the newly merged acquirer, such as Mount Tam Biotechnologies.
Mount Tam Biotechnologies
8001 Redwood Blvd., Novato, CA 94945
CEO: Richard Marshak
CFO: Jim Stapleton
Ticker: MNTM (OTC PINK)