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  Staff Interpretation Letter 2016-2
Identification Number 1144
This is in response to your correspondence requesting an exception under Listing Rule 5635(f) to Nasdaq’s otherwise applicable shareholder approval requirements with respect to a proposed issuance of securities (the “Proposed Transaction”).
You represented that the Company has experienced a rapid and substantial deterioration in its financial condition due to several events each of which alone jeopardizes the financial viability of the Company. Additionally, in its most recent Form 10-Q, the Company noted there is substantial doubt in its ability to continue as a going concern.
In August 2015, the Company completed a private placement of convertible notes (the “Notes”), Series A warrants and Series B warrants. You stated that the Company is in default under the terms of the Notes and related registration rights agreement, and if declared in default by the Note holder, the entire principal amount plus interest and any penalties would be immediately due. Additionally, you stated that based on its current cash position, the Company expects in the near term to trigger a default under a technology agreement with its largest customer. You stated that without the Proposed Transaction, the Company does not have sufficient cash to repay the Notes or meet its obligations under the technology agreement and would have to seek bankruptcy protection.
In the Proposed Transaction, you stated that the Company will issue to one investor (the “Investor”) shares of common stock, a convertible note, and warrants to purchase shares of common stock equal to greater than 20% of the existing total shares outstanding. The price per share of common stock and conversion price of the note will be based on a 20-day simple moving average, and the exercise price of the warrants will be at a premium to the current market price. However, due to the fluctuation in the Company’s stock price, the price per share of the common stock and the conversion price of the notes may potentially be at a discount to the market value. Additionally, following the closing of the Proposed Transaction, the Investor could potentially own greater than 50% voting power and beneficial ownership in the Company.
You stated that part of the proceeds from the Proposed Transaction will be used to pay off the Notes as well as any interest and penalties accrued and past due. Any remaining proceeds will enable the Company to continue to meet covenants under its technology agreement and provide adequate capital for the Company to operate over the next 12 months. Additionally, the Company will lower the exercise price of its outstanding Series A warrants to an exercise price that is greater than the current market value. Finally, the Note holder will exercise the Series B warrants up to no more than the Note holder owning 9.9% of the shares outstanding. Any remaining Series B warrants will be canceled.
You stated that the Company has been unsuccessful in obtaining alternative financing given its current capital structure and depressed share price. Despite these efforts, you represented that there are currently no realistic alternatives to the Proposed Transaction and as a result, there is not enough time to obtain shareholder approval prior to the issuance of the shares of common stock in the Proposed Transaction as a delay may cause the Company to declare bankruptcy. You also represented that prior to the Proposed Transaction, the Company engaged an outside law firm to evaluate its options including bankruptcy. Finally, you stated that the Company expects that the Proposed Transaction would enable the Company to meet the requirements for continued listing on Nasdaq for at least the next year.
Without the requested exception, shareholder approval would be required:
  • pursuant to Listing Rule 5635(b) because the Proposed Transaction would result in a change of control of the Company due to the fact that the Investor will own greater than 20% of the common stock and voting power outstanding upon completion of the Proposed Transaction; and
  • pursuant to Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price that may be less than the greater of book or market value.
Based on our review of the circumstances described in your correspondence and on your representations regarding: (i) the Company’s financial condition, (ii) the dire consequences to the Company should it not obtain the financing provided by the Proposed Transaction, and (iii) the Company’s expectation that it will remain in compliance with all applicable continued listing requirements upon completion of the Proposed Transaction, we have determined to grant the requested exception to the shareholder approval rules. In order to rely upon this exception, the Company must mail to all shareholders, not later than ten days before the issuance of any securities, a letter describing the Proposed Transaction (including the number of shares of common stock that could be issued and the consideration received) and alerting shareholders to the omission to seek the otherwise required approval. The letter must indicate that the Company is relying on a financial viability exception to the shareholder approval rules and that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on this exception. The Company must also make a public announcement by filing a Form 8-K, where required by rules of the SEC, or by issuing a press release, disclosing the same information as required in the letter as promptly as possible but not later than ten days before the issuance of the securities.
Publication Date*: 4/8/2016 Mailto Link Identification Number: 1144
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