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  Staff Interpretation Letter 2008-18
Identification Number 762
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 two proposed transactions (the “Proposed Transactions”).
According to the information you provided, in one of the Proposed Transactions, the company would issue to Investor One shares of common stock, and warrants exercisable for additional shares, in connection with a loan agreement pursuant to which Investor One would provide a credit facility.  In the other of the Proposed Transactions, the company would issue to Investor Two a note convertible into shares of common stock (the “Convertible Note”) and warrants exercisable for additional shares.  Because the Proposed Transactions would occur at about the same time and the proceeds would be used for the same purpose as described below, the Proposed Transactions would be aggregated for purposes of determining whether shareholder approval would be required.  Without the requested exception, shareholder approval would be required pursuant to Listing Rule 4350(i)(1)(D)(ii) (the “Rule”) because the aggregate issuance would exceed 20% of the pre-transaction outstanding shares at a discount to the greater of book or market value.  Neither Investor One nor Investor Two (collectively, the “Investors”) is an officer, director, employee, or consultant of the company.  Neither would own as much as 20% of the company’s outstanding shares of common stock or voting power as a result of the Proposed Transactions.  Investor Two would be entitled to appoint one member of the company’s board of directors for as long as it and its affiliates hold a specified interest in the company.
With regard to the company’s financial condition, you stated that the company lacks the necessary funds to pay the outstanding principal amount on its Senior Secured Notes (the “Senior Notes”), which will be due in full at maturity in approximately two weeks (the “Amount Due”).  The Amount Due is approximately triple the amount of the company’s current cash and cash equivalents.  The Senior Notes are secured by a first lien security interest in all of the company’s assets.  The company has unsuccessfully attempted to pursue a restructuring of the Senior Notes.  You stated that if the company does not pay the Amount Due at maturity, the holder of a majority of the Senior Notes could initiate foreclosure proceedings, which would likely force the company to seek bankruptcy protection.  The proceeds from the Proposed Transactions would be used in part to make the required payment on the Senior Notes.
You stated that over the past several months the company attempted to secure financings with sufficient time to obtain shareholder approval or that would not require shareholder approval.  In that regard, approximately two weeks ago, discussions between the company and the Investors resulted in term sheets for transactions which the company believed would not require shareholder approval.  Subsequently, however, the company’s market value declined to an amount below its book value such that the definitive terms included an issuance price below book value, thereby requiring shareholder approval.  In addition, the terms have changed such that the issuance price and exercise price would be below market value and would be subject to future reductions.  The company unsuccessfully attempted to get the Investors to restructure the Proposed Transactions to meet the requirement of the Rule, such as by seeking shareholder approval for any issuance beyond 19.9% of the pre-transaction outstanding shares.  You stated that the Investors have been unwilling to delay any portion of their funding pending shareholder approval.  Moreover, you stated that the company has concluded that the delay in securing shareholder approval would seriously jeopardize the financial viability of the company.
The company believes that following the Proposed Transactions it will be in compliance with all of the requirements for continued listing on NASDAQ with the possible exception of the bid-price requirement.  In that regard, the company has committed to effect a reverse split of its common stock if necessary to comply with the bid-price requirement upon the expiration of any applicable grace periods.
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.  This determination is based on your representations regarding the company’s inability to meet its payment obligations on the Senior Notes and its likely need to seek bankruptcy protection in the event that the Proposed Transactions are 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 Transactions, a letter describing the Proposed Transactions 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.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 762
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