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  Staff Interpretation Letter 2008-26
Identification Number 770
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 convertible notes (the “Notes”) in a transaction with the Investor (the “Proposed Transaction”).  
According to the information you provided, the company would borrow funds by issuing to the Investor the Notes, which would be convertible into more than 20% of the company’s pre-transaction outstanding shares of common stock at a discount to the market value.  Following conversion, the Investor could own a majority of the company’s then outstanding shares of common stock.  In addition, as part of the Proposed Transaction, the Investor would make a cash payment to the company in exchange for an exclusive license to develop and distribute one of the company’s products.  Without the requested exception, shareholder approval would be required of the issuance of the Notes 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.  In addition, because two members of the company’s board of directors are also on the board of the Investor, shareholder approval may be required pursuant to Listing Rule 4350(i)(1)(A).
According to the information you provided, for over a year the company has unsuccessfully attempted to secure other financings.  You stated that the two most cited obstacles to securing investments in the company have been the uncertainty with respect to approval of one of its products by the United States Food and Drug Administration (the “FDA”) and the high cost to maintain the company’s manufacturing infrastructure during the approval process.  The company does not know whether or when it will secure FDA approval.
The company has implemented cash conservation measures including reducing its workforce by approximately 24%, reducing salaries for certain senior employees, and deferring payments to certain suppliers.  Nevertheless, the company currently projects that it will have enough cash to fund operations for less than four weeks at which point it would no longer be financially or operationally viable absent the Proposed Transaction.  You stated that its cash cannot sustain it through the duration of a proxy solicitation process and, consequently, the company would be required to cease operations and file for bankruptcy or otherwise liquidate, absent the exception.
You stated that the Investor is not willing to enter into the Proposed Transaction on terms that would comply with the shareholder approval requirements and is not willing to commit to any part of the Proposed Transaction subject to any material contingency.  You indicated that the Proposed Transaction represents the company’s best opportunity to avoid insolvency and the cessation of its operations.  The company has retained bankruptcy counsel.
The company would use the proceeds from the Proposed Transaction to fund its activities in support of its efforts to obtain FDA approval.  The company expects that the Proposed Financing would be sufficient to fund its operations for more than six months.  Currently, the company is pursuing alternatives for an additional financing, and, in that regard, it has hired a placement agent.  You stated that without the Proposed Transaction, however, the company would not be able to pursue this or any other additional financing (the “Subsequent Financing”).
Two of the company’s directors are also on the board of the Investor, and one of those directors is the Investor’s CEO.  Both of the directors recused themselves from all of the company’s board decisions relating to the Proposed Transaction and will not receive any compensation from the company or the Investor in connection with the Proposed Transaction.
The company currently complies with all requirements for continued listing except for the bid price and stockholders’ equity requirements and has addressed these deficiencies at a hearing before a NASDAQ Qualifications Panel (the “Panel”).  As of the date of this letter, the Panel has not rendered a decision regarding these concerns.  However, the company has received shareholder approval to effect a reverse stock split to address its bid price deficiency and believes that it will comply with the market value of listed securities alternative to the equity requirement when the Proposed Transaction is announced.  The company also believes that it will satisfy the equity requirement if it is successful in completing the Subsequent Financing.
Based on our review of the circumstances described in your correspondence, 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 issuance of the Notes 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 connection with the issuance of the Notes, a letter describing the issuance of the Notes 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.  This determination in no way affects the jurisdiction of the Panel, or any decision that is rendered by the Panel, with regard to the matters under its consideration relating to the company’s compliance with the continued listing requirements.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 770
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