Sell Your NOLs
by Tracey Porpora

The Princeton-based Voxware, Inc. raised $500,000 last year to perfect its voice recognition products. But the high-tech company didn't obtain the funding through bank loans or equity financing. Instead, Voxware sold some of its net operating losses (NOLs) to another New Jersey business. Voxware was one of 61 companies that sold some of its NOLs last year through New Jersey's Technology Business Tax Certificate Transfer Program, which allows new and expanding technology companies to turn their tax losses and credits into cash.

"We spent a lot of marketing dollars that we otherwise couldn't have spent without the money from the sale of our NOLs." said Nick Narlis, senior vice president and CFO of Voxware, Inc., which develops integrated voice-based solution products for eLogistics. "It's a source of financing which otherwise wouldn't have been realized until later when the company became profitable. And it's money in the bank," he added.

Through the program, approved technology businesses actually sell their unused NOLs to any corporate taxpayer in the state for at least 75 percent of the value of the tax benefits. The buying individual or company pays less taxes, and the new technology business has immediate cash to spend on working capital, equipment, office or lab space or other operating expenses.

"The purpose of the program is to allow high-tech and biotech companies to take advantage of their losses and help them to grow their business," said Caren Franzini, executive director of the New Jersey Economic Development Authority (NJEDA). "The biggest advantage is giving a company cash today to continue their technology research and development and have them stay here in New Jersey and grow," she added.

Sponsored by NJEDA, in conjunction with the New Jersey Division of Taxation and the Commission on Science and Technology, the program was the first of its kind launched in the country, said Franzini. It was developed last year to support the growth of the technology industry in the Innovation Garden State.

While $50 million in tax certifications were awarded last year, $40 million in tax losses can be sold annually through the program. The exchange of money is made through a certificate identifying the value of the tax benefits. The certificate is then transferred from the selling company to the purchasing company or individual.

One high-tech company that took advantage of the program is Sensar, Inc., which invented the Secure Cam, an iris imaging and video conferencing camera that can be used to uniquely identify a person. "The pitfalls of being a high-tech company is that a lot of capital goes in and a lot of losses are generated," said Patrick Lang, vice president of finance and administration and CFO of the Morristown-based Sensar, Inc. "Many times, high-tech companies just run out of money," said Lang who noted that Sensar received about $600,000 last year for selling NOLs through the program. "It allowed Sensar to redirect some of those monies to the continuing development of this information security product," added Lang.

He noted that Sensar's NOLs , which in New Jersey expire after seven years, would have been lost if they weren't sold though the program last year. "Sensar was at risk of losing some NOLs that would have expired. It (the program) gives companies the ability to recoup some benefit from some NOLs that would otherwise expire before they have a chance to be profitable," he said.

Supporters of the program say it has already proved successful in keeping high-tech companies from fleeing the state boundaries in search of cheaper research and development costs. "It allows the state to say, 'Listen, you are the types of industries we would like to maintain in our state. We are very much behind you and this is one initiative of many that will allow you to get cash in your pocket right now, even though you're still losing money,'" said David Weiss, an associate attorney with the Basking Ridge-based law firm of Porter and Mennen, who was involved in kick-starting the program in the state legislature, as well as helping many of the buyers and sellers close their deals last year.

"The flip benefit is instead of the state cutting the check, they are allowing the marketplace to cut the check," he added.

Last year, 61 of the 100 companies that applied were approved to take part in the program. To qualify for the program, the technology company must employ 225 people or less, and 75 percent of the employees must be based in New Jersey. A selling company can reapply for the program each year, but can't receive more than $10 million through the program, said Franzini. However, there are no limits on how much a purchasing company can buy through the program, she said.

Anyone interested in applying for the program must have applications submitted by June 30 of each year. Approvals are made in early fall. For more information about the program, call NJEDA's Division of Commercial Lending at 609-292-0187 or email to cld@njeda.com.