This is in response to your letters regarding the applicability of the shareholder approval requirements of Marketplace Listing Rule 4350(i)(1)(D)(ii) (the “Rule”) to a proposed issuance of securities (the “Proposed Transaction”) expected to close within
a month. You asked whether the Proposed Transaction would: (i) be aggregated with a private placement completed approximately five months ago (the “Prior Transaction”) for purposes of the applicability of the Rule, and (ii) result in a change of control that
will require shareholder approval under Listing Rule 4350(i)(1)(B). While incorporated outside the United States, the company does not qualify as a Foreign Private Issuer. Its American Depositary Shares (“ADS”) are listed on The NASDAQ Capital Market, and
the ratio of ADS to ordinary shares is one-to-one.
According to the information you provided, pursuant to the Proposed Transaction, the company would issue Exchangeable Preferred Shares (the “Preferred Shares”) to approximately eight investors. Each Preferred Share would be convertible based on a conversion
price which is expected to be a discount to the market price. Each Preferred Share would carry an annual dividend payable in ADS for the first year only and thereafter only in cash. The maximum number of ADS issuable upon the conversion of the Preferred
Shares and the payment of the dividends would be 19.9% of the pre-transaction outstanding ADS. In addition, in the Proposed Transaction, the investors would receive warrants representing 115% warrant coverage of the ADS issuable in the transaction. The warrants
would be exercisable for no less than the closing bid price immediately preceding the entering into of the binding agreement and would not be exercisable until six months following the date of closing.
In the Prior Transaction, the last tranche of which closed approximately five months ago, the company issued securities representing approximately 19.9% of the pre-transaction outstanding ADS at a discount to the market price.
You stated that at the time of the Prior Transaction, the Proposed Transaction was not contemplated, and the company did not anticipate the need to complete any type of additional financing until well into 2006 or later. However, a line of credit, which
had been secured and subsequently approved by shareholders in the 2nd quarter of 2005 is no longer available because the company’s stock price has fallen below the minimum allowable under the line of credit agreement. As a result, the company needs the additional
financing to be raised in the Proposed Transaction. The proceeds from both the Prior Transaction and the Proposed Transaction will be used for the company’s general working capital.
You stated that none of the investors that participated in the Prior Transaction will participate in the Proposed Transaction. In addition, no officer, director, employee, or consultant of the company will participate in the Proposed Transaction. You
stated that there are no affiliates or groups among the investors and that pursuant to the terms of the Proposed Transaction, no investor will be permitted to hold more than 4.9% of ADS outstanding. The Preferred Shares have no voting power, and the investors
will not be entitled to any special board representation.
Following our review of the information you provided, we have determined that the Proposed Transaction would not be aggregated with the Prior Transaction for purposes of the Rule because: (i) the Proposed Transaction was not contemplated at the time of
the Prior Transaction; (ii) there were no contingencies between the two transactions; (iii) none of the investors who participated in the Prior Transaction will participate in the Proposed Transaction; and (iv) approximately six months will have passed between
the two transactions. In addition, based on your representations regarding the Proposed Transaction, shareholder approval is not required for the Proposed Transaction under the Rule because the issuance of the ADS, although at a price less than market value,
will equal less than 20% of the ADS and voting power outstanding on a pre-transaction basis. Because the exercise price of the warrants will not be less than the greater of book and market value, and the warrants may not be exercised until six months after
the date of closing, the warrants also do not require shareholder approval. Further, given the ownership limitation described above, the Proposed Transaction will not result in a change of control and will not require shareholder approval under Listing Rule
4350(i)(1)(B).