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Frequently Asked Questions
  Staff Interpretation Letter 2007-4
Identification Number 780
This is in response to your correspondence regarding a proposed issuance of securities in connection with a restructuring of the company’s debt (the “Restructuring”) and a subsequent private placement (the “Private Placement”).  With respect to the Restructuring and Private Placement (collectively, the “Transactions”), you asked that the company be granted an exception to the shareholder approval requirements pursuant to Marketplace Listing Rule 4350(i)(2).
According to the information you provided, due to recent concerns about its solvency, the company has retained bankruptcy counsel.  Approximately one month ago, the company failed to make principal and interest payments under its senior convertible note (the “Note”) and took steps toward an intended filing under Chapter 11 of the U.S. Bankruptcy Code.  Prior to the intended filing, the company entered into negotiations regarding the Restructuring with the Original Holder to whom the company had issued the Note approximately nine months ago and who still held the Note at the time the negotiations commenced.
Under the Restructuring, pursuant to a note purchase agreement (the “Note Purchase Agreement”), the Original Holder has already sold the Note to the Buyer, and the company has promised to issue warrants (the “Warrants”) to the Original Holder exercisable for shares of common stock.  The Warrants will be issued only after the company is permitted to do so under the applicable NASDAQ requirements.  The Buyer has agreed that the company will not be required to make any payments of principal or interest for 30 days following the Note Purchase Agreement (the “Forbearance Period”).  Following the Forbearance Period, the principal and interest payments would resume unless the Notes have been fully converted into common stock as expected under the terms of the Restructuring.  In that regard, the company and the Buyer have agreed to amend the terms of the Note to provide that when permitted by NASDAQ’s rules, the Notes will convert into shares of common stock.  Following such conversion, all of the covenants (the “Covenants”) and required payments under the Notes will cease to exist.  You stated that as a condition to the Buyer purchasing the Note, the company has entered into an agreement for the Private Placement with new investors (the “Investors”).  The number of shares of common stock that would be issued in the Restructuring and the Private Placement would equal more than 20% of the pre-transaction outstanding shares.  As such, without the requested exception, shareholder approval would be required pursuant to Listing Rule 4350(i)(1)(D)(ii) and possibly also pursuant to Listing Rule 4350(i)(1)(B).
Previously, the company attempted to raise new capital but investors were unwilling to invest due to the Covenants associated with the Note.  The Original Holder was unwilling to renegotiate the terms of the Covenants, but was willing to sell the Note to the Buyer under the Restructuring.  The Investors will purchase shares in the Private Placement only after the Covenants cease to exist.
In your submission, you stated that the delay necessary to seek shareholder approval would seriously jeopardize the financial viability of the company and that the Restructuring and the Private Placement are the company’s last alternative to filing for bankruptcy protection.  You stated that the company does not have sufficient cash on hand or otherwise available to continue its operations, or to meet its other current obligations, long enough to obtain shareholder approval.  In that regard, you noted that the company’s past due general vendor payables and payroll expenses exceed its available cash.  Moreover, you indicated that the company would be unable to make payments on the Note following the Forbearance Period.
The Private Placement would enable the company to meet its current obligations, specifically rent, utilities and payroll.  In addition, the company would be better positioned for the future because the proceeds would be used in part to increase its manufacturing capacity to enable it to fulfill an existing sales agreement.
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 financial commitments and its likely need to seek bankruptcy protection in the event that the 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 Transactions, a letter describing the 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 the exception; and (iii) the company must issue a press release that includes the information required to be included in the shareholder mailing.
Publication Date*: 7/31/2012 Mailto Link Identification Number: 780
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