This is in response to your correspondence requesting: (i) an exception under
Listing Rule 5635(f) from the shareholder approval requirements, and (ii) an exception from the voting rights requirements of
Listing Rule 5640 and
IM-5640 (collectively, the “Voting Rights Rule”), with respect to a proposed transaction (the “Proposed Transaction”).
According to the information you provided, in the Proposed Transaction the company would issue to the Investor: (i) preferred stock convertible into common stock, (ii) warrants exercisable for additional common shares, and (iii) a non-convertible senior
secured note. The conversion price of the preferred stock and the exercise price of the warrants would be at a discount to the market value of the common stock. The preferred stock would vote on an as-converted basis. As a condition to closing, the Investor
requires that members of the company’s management (the “Insiders”) purchase securities in the Proposed Transaction.
You stated that for the past several years the company has experienced net losses and negative working capital as its current liabilities have exceeded its current assets. The company has been able to operate under these conditions due primarily to advance
payments made to it by its largest customer (the “Customer”) and to a credit facility (the “Credit Facility”) provided by a bank (the “Bank”). Both of these arrangements, however, recently changed in ways detrimental to the company. Approximately four months
ago, the Customer notified the company that it was reducing the amount of business it does with the company and, as a result, would require the company to repay a significant amount in advance billings. The company had not anticipated this business reduction
or the repayment requirement because it was unprecedented over the course of a long relationship with the Customer. In addition, approximately six months ago, the Bank suspended the Credit Facility as a result of the company’s failure to comply with various
covenants.
You stated that as a result of the foregoing factors, the company is currently in severe financial distress and has been required to delay substantial payments past due to its clients and vendors, negatively impacting the company's business and its ability
to generate revenues. On several recent occasions, the company was able to meet its payroll obligations only after the receipt of funds from clients within 24 hours of the time such obligations were due. Currently, the amount of the company’s accounts payable
exceeds its available cash.
Approximately six months ago, the company began considering various financing alternatives and believed that it would be able to raise sufficient funds in a transaction that would not require shareholder approval. As its financial condition continued to
deteriorate, however, the company concluded that it would need to raise more funds than would be provided by the transactions then under consideration. As a result, the company entered into negotiations with the Investor leading to the Proposed Transaction.
The Investor was unwilling to enter into a transaction that would satisfy the shareholder approval and voting rights requirements.
Without the requested exceptions, the Proposed Transaction would require shareholder approval pursuant to: (i) Listing Rule 5635(b) because the issuance would result in a change of control; (ii) Listing Rule 5635(c) because the issuance at a discount to
the Insiders would be considered equity compensation; and (iii) Listing Rule 5635(d) because the issuance would exceed 20% of the pre-transaction outstanding shares at a price less than the greater of book or market value. Additionally, without the requested
exception, the Proposed Transaction would not comply with the Voting Rights Rule because the preferred stock would effectively have greater voting rights than the common stock because it would vote on an as-converted basis and would convert at a discount to
the market value.
You stated that the company has concluded that a delay in closing the Proposed Transaction to secure shareholder approval would seriously jeopardize its financial viability. The company believes that if it does not consummate the Proposed Transaction as
soon as possible, its financial position will continue to deteriorate and it will be unable to meet its current obligations, resulting in the company being forced to cease all or a substantial portion of its operations and/or file for bankruptcy.
The company believes that if it is able to consummate the Proposed Transaction, its working capital deficit would be significantly reduced immediately and then eliminated within approximately five months as a result of projected earnings. In addition,
the company believes that following the Proposed Transaction, it will meet the requirements for continued listing on NASDAQ.
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 requested exception to the shareholder approval rules. This determination
is based on your representations that the company needs to quickly proceed with the Proposed Transaction to avoid bankruptcy and that the Insiders did not negotiate the terms of the Proposed Transaction and are participating only at the insistence of the lead
investor and on the same terms as that investor. In addition, we have determined to grant an exception from the Voting Rights Rule as it applies to the voting power of the preferred stock because both that rule and former Rule 19c-4 permit such an exception
where necessary to rescue a company in financial distress. 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, a letter describing the Proposed Transaction
and alerting shareholders of the omission to seek their otherwise required approval; (ii) the letter must indicate that the audit committee, or a comparable independent body of the board of directors, has expressly approved reliance on the exception; and (iii)
the company must 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.