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Staff Interpretation Letters
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All Years; Shareholder Approval; All
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Identification Number
720
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This is in response to your correspondence wherein you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2) for a proposed transaction that will enable the company to repay
or refinance its 2009 Debt Obligations (the “Proposed Transaction”).
According to the information you provided, when a portion of the company’s 2009 Debt Obligations recently matured, the company lacked sufficient capital to repay it (without seeking protection under the bankruptcy laws) and only the Investor was willing
to extend adequate credit to refinance it. The Investor extended to the company an initial credit facility to allow the company to repay the portion of its 2009 Debt Obligations then due and to provide additional working capital.
The Investor also agreed to invest additional funds in the Proposed Transaction, which would enable the company to service or refinance the remainder of its 2009 Debt Obligations. In order to induce the Investor to commit to making such additional investment,
the company agreed to issue two series of convertible preferred stock, one voting and one non-voting, convertible into more than 20% of the pre-transaction outstanding common shares at a discount to the market price of the company’s common stock. The company
also agreed that the Investor would be allowed to designate a number of board members that would approximately correspond to its initial percentage equity ownership interest in the company and would decline pro ratably with any future decline in its ownership
percentage.
Without the requested exception, shareholder approval would be required pursuant to: (i) Listing Rule 4350(i)(1)(B) because the issuance could result in a change of control; and (ii) Listing Rule 4350(i)(1)(D)(ii) because the potential issuance would exceed
20% of the pre-transaction outstanding shares at a discount to the market value. Additionally, without the exception, the Proposed Transaction would not comply with the voting rights rule contained in Marketplace Listing Rule 4351 because the voting convertible
preferred stock would vote on an as-converted basis and could be converted at a discount to the market value.
You stated that the recent economic downturn and deepening credit crisis had forced the company to look for new sources of capital to survive as a going concern. You further stated that absent the funding from the Proposed Transaction, the company would
have no choice other than to file for protection under applicable bankruptcy laws. In that regard, you noted that failure by the company to have in place a committed plan that would resolve the 2009 Debt Obligations within approximately two weeks of the date
of your letter to us would constitute default under the company’s credit facilities, which would accelerate the company’s obligation to repay immediately the entire 2009 Debt Obligations and cross-accelerate repayment obligations with respect to a substantial
portion of the company’s other indebtedness. As a result, you indicated that unless the company completed the Proposed Transaction, it would be forced to seek bankruptcy protection.
You stated that for the past six months the company has been exploring its refinancing options with two separate investment advisors. However, due to the prevailing instability in the credit and financial markets, the company has been unable to enter
into any other refinancing transaction. The company proposed various recapitalization structures to potential investors, including the Investor, which would have provided the company sufficient time to obtain shareholder approval. However, the Investor insisted
that the stock issuance be completed in a manner necessitating complying with, or obtaining an exception from, the shareholder approval requirements, and the company was unable to identify any viable alternatives.
The company believes that the Proposed Transaction would enable it to service or refinance its 2009 Debt Obligations, as well as its other debt obligations due in the following years. The company expects that if it receives the exceptions discussed above
and completes the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ except for the bid-price requirement. In that regard, the company has committed, if necessary, to complete a reverse stock split of a ratio sufficient to
comply with the bid-price requirement.
Based on our review of the circumstances described in your correspondence and on your representations regarding the company’s financial condition, we have determined to grant the exception from the shareholder approval requirements and voting rights rule.
This determination is based on your representations regarding the company’s inability to repay its 2009 Debt Obligations while maintaining adequate working capital and its likely need to seek bankruptcy protection in the event that the Proposed Transaction
is delayed. The exception is subject to the following: (i) the company must mail to all shareholders, not later than ten days before the issuance of any securities in the Proposed Transaction, a letter describing the Proposed Transaction and alerting them
to its omission to seek the shareholder approval that would otherwise be required; (ii) the letter must indicate that the audit committee, or a comparable body of the board of directors, has expressly approved reliance on the exception; and (iii) the company
must also make a public announcement through the news media disclosing the same information as promptly as possible, but no later than ten days prior to the issuance of the securities.
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Publication Date*:
7/31/2012
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Identification Number:
720
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