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  Staff Interpretation Letter 2008-20
Identification Number 764
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 issuance of warrants in a proposed transaction (the “Proposed Transaction”) with the Investors.
According to the information you provided, in the Proposed Transaction, the company would issue to the Investors non-convertible notes and warrants.  The warrants would be exercisable for more than 20% of the company’s pre-transaction outstanding shares of common stock at a price less than the greater of book or market value.  Without the requested exception, shareholder approval would be required of the issuance of the warrants pursuant to: (i) Listing Rule 4350(i)(1)(B) because the potential 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 greater of book or market value.  You stated that absent the exception, the company would be required to cease its operations and either file for bankruptcy protection or liquidate.
The company believes that its current and future financial operations, and its potential sources of funding, have been negatively impacted by several factors including economic conditions, which the company believes has caused it to experience lower than expected sales.  You stated that in light of its difficulties, the company undertook extensive efforts to conserve cash and reduce expenditures, and it has laid-off approximately 20% of its employees.  Nevertheless, the company projects that it will run out of cash in approximately three weeks unless it can complete the Proposed Transaction.  Following the Proposed Transaction, the company expects to restructure its operations and to explore additional options for further cost reductions.  You stated that without the Proposed Transaction, the company faces certain insolvency and would be unable to pursue these activities.  The company has already retained bankruptcy counsel.
Over the past several months, the company unsuccessfully attempted to obtain financing either on terms that would not require shareholder approval or within a timeframe that would have allowed the transaction to be submitted to shareholders.  With respect to the Proposed Transaction, the Investors indicated to the company that they would be unwilling to proceed if the warrant coverage were to be eliminated or reduced.  In addition, the Investors indicated that they are not willing to proceed based on a deferred issuance of the warrants or a delay in the warrants’ exercisability pending a shareholder vote.
As a condition to the Proposed Transaction, the company will adopt a budget that includes cost reduction and asset management measures intended to ensure that the company can reach positive cash flow operations without reliance on additional financing. These measures include the possible sale of certain assets (the “Assets Sale”).  The company has retained investment banking firms to assist in the Assets Sale and has already entered into agreements for the sale of a significant portion of its assets.
The Investors do not include any officer, director, employee, or consultant of the company.  An employee of Investor One serves on the company’s board of directors.  That director, however, is not a partner in, or a controlling shareholder or executive officer of, Investor One and will not be the beneficial owner of, or have a pecuniary interest in, the securities that Investor One would acquire in the Proposed Transaction.
The company believes that following the Proposed Transaction 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 take the necessary action to address the bid price issue during the applicable compliance period.
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 financial condition 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.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 764
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