This is in response to your correspondence regarding whether an issuance of securities in a potential private placement (the “Private Placement”) would be aggregated with an issuance in a pending acquisition (the “Acquisition”) for purposes of determining
whether shareholder approval would be required under
Listing Rule 5635(a)(1).
According to the information you provided, approximately six weeks ago the company entered into the agreement for the Acquisition, pursuant to which it will acquire certain property and equipment from the Target in exchange for approximately $200,000 in
cash and shares of the company’s common stock equal to approximately 10% of its pre-transaction outstanding shares and voting power. The company first considered the Acquisition over one year ago and held initial discussions with the Target more than ten months
ago. On multiple occasions, the company’s board of directors considered the Acquisition and directed management to continue its efforts to reach an agreement with the Target. The Acquisition is expected to close within approximately two months.
The company has not yet determined whether it will proceed with the Private Placement nor has it settled on a precise structure. The Private Placement would be part of the company’s overall corporate financing strategy and the use of the proceeds from
the Private Placement would be for general corporate purposes, working capital, and possible future acquisitions. The company anticipates that if it chooses to proceed, the Private Placement would occur within approximately three months. You stated that the
company is considering the Private Placement at this time because it believes that the equity markets have strengthened, making this an opportune time to undertake such a financing. If, however, the equity markets were to weaken materially in the near future,
or the company's stock price were to decline, you indicated that the company might not proceed with the Private Placement and would not be forced to sell equity on unfavorable terms in order to raise cash to fund its operations.
You stated that the Acquisition is not linked to, or conditioned upon, the Private Placement and that, likewise, the Private Placement would not be linked to or conditioned upon the Acquisition. The company is obligated to close the Acquisition without
regard to whether it chooses to pursue the Private Placement. The Target will be the sole recipient of the company’s shares in the Acquisition and will not be a purchaser in the Private Placement. The proceeds from the Private Placement would not be used to
replenish any cash expended on the Acquisition. The company’s management concluded that the company could complete the Acquisition and still have sufficient cash to meet the anticipated needs of the combined businesses without raising additional capital.
Following our review of the information you provided, we have determined that the issuance in the Private Placement would not be deemed to be in connection with the Acquisition. We have reached the conclusion because: (i) the Private Placement would not
be conducted to raise funds to be used as consideration for the Acquisition or to fund the company’s cash needs arising from the Acquisition; and (ii) neither the Private Placement nor the Acquisition would be contingent on the other. As such, the issuances
in the Private Placement and the Acquisition would not be aggregated for purposes of determining the applicability of Listing Rule 5635(a)(1). Accordingly, the issuance of shares to the Target in the Acquisition will not require shareholder approval under
Listing Rule 5635(a)(1) because the issuance will be less than 20% of the pre-transaction outstanding shares and voting power. Please note that we are not providing any guidance as to whether shareholder approval will be required under Listing Rule 5635 for
the Private Placement because the terms of that transaction have not yet been determined.