PROPOSAL 4 - AUTHORIZATION OF THE BOARD OF DIRECTORS TO EFFECT A REVERSE STOCK SPLIT
We are asking our stockholders to authorize the Board, to effect a Reverse Stock Split of all outstanding shares of our common stock at an exchange ratio in the range of 1 for 6 to 1 for 20. The Board has up to one year from the date of the Annual Meeting to effect the Reverse Stock split, if it decides to effect it at all. The exact ratio to be chosen by the Board will be determined as to what is in the best interests of the Company, as the Board expects that it will increase the share price of our Common Stock. The Board believes that if we are successful in maintaining a higher price per share of our Common Stock, we will be able to generate greater interest among investors and institutions. If we are successful in generating such interest, we anticipate that our Common Stock would have greater liquidity and a stronger investor base.
The Reverse Stock Split would reduce the number of shares of Common Stock issued and outstanding from approximately [200,739,432] million shares as of ________, 201__, to approximately __________ shares based on the maximum 1-for-20 Reverse Stock Split shares or to approximately __________ shares based on the minimum 1-6 Revise Stock Split Shares. By reducing the number of issued and outstanding shares of Common Stock, with a less than proportionate decrease in the number of authorized shares, more shares of Common Stock will be available for issuance as a result of the Reverse Stock Split. The Board believes that the availability of more shares of Common Stock for issuance will allow the Company greater flexibility in pursuing financing from investors and issuing shares of Common Stock in exchange for such financing, meeting business needs as they arise, taking advantage of favorable opportunities, and responding to a changing corporate environment. At the same time as the Reverse Stock Split, the number of authorized shares of our Common Stock will be reduced from 325 million to 200 million, with no change to the par value.
The Board is also asking the stockholders to approve the corresponding amendment to the Certificate of Incorporation to effect the Reverse Stock Split.
If stockholders approve this proposal, the Board of Directors would cause an amendment to the Company’s Certificate of Incorporation to be filed with the Secretary of State of the State of Delaware and effect the reverse stock split only if the Board of Directors determines thereafter that the reverse stock split would be in the best interests of the Company and its stockholders at the time. The Board of Directors may determine in its discretion a whole-number ratio in the range of 1 for 6 to 1 for 20 at which to effect the reverse stock split. The Board of Directors also may determine in its discretion not to effect any reverse stock split and not to file the corresponding amendment to the Company’s Certificate of Incorporation. No further action on the part of stockholders will be required to either effect or abandon the reverse stock split.
There is no guarantee that the Reverse Stock Split will increase the share price of our Common Stock.
Purpose of the Reverse Stock Split
The Board of Directors believes that it is in the best interests of the Company and its stockholders to seek the requisite approvals to reduce the number of issued and outstanding shares of Common Stock through a reverse stock split. Immediately following the completion of a reverse stock split, the number of shares of Common Stock issued and outstanding would be reduced proportionately based on the reverse stock split ratio determined by the Board of Directors, which must be within the range approved by the Company’s stockholders.
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The Board of Directors believes that effecting a reverse stock split is likely to increase the market price for the Common Stock, as fewer shares will be outstanding. The Board of Directors believes that approval of several options for the ratio of the reverse stock split provides it with flexibility to achieve the purposes of the reverse stock split.
The Company currently does not have any plans, arrangements or understandings, written or oral, to issue any of the authorized but unissued shares of Common Stock that would become available as a result of the reverse stock split.
Board Discretion to Effect the Reverse Stock Split
No further action on the part of stockholders will be required to either effect or abandon the reverse stock split. If this proposal is approved by stockholders and the Board of Directors determines to effect the reverse stock split, the Company would communicate to the public, prior to the effective time of the reverse stock split, additional details regarding the reverse stock split (including the final reverse stock split ratio, as determined by the Board of Directors). The Board of Directors reserves the right to elect not to proceed with the reverse stock split if it determines, in its discretion, that the reverse stock split is not in the best interests of the Company and its stockholders.
Certain Risks Associated with the Reverse Stock Split
There can be no assurance that following the reverse stock split the market price of the Common Stock will increase in proportion to the reduction in the number of shares of Common Stock issued and outstanding before the proposed reverse stock split. Other factors, such as the Company’s financial results, market conditions, and the market perception of the Company’s business may adversely affect the market price of the Common Stock. As a result, there can be no assurance that the reverse stock split, if completed, will result in the intended benefits, including as described herein, that the market price of the Common Stock will increase following the reverse stock split or that the market price of the Common Stock will not decrease in the future. Additionally, we cannot assure you that the market price per share of the Common Stock after a reverse stock split will increase in proportion to the reduction in the number of shares of the Common Stock outstanding before the reverse stock split. Accordingly, the total market capitalization of the Company, based on the outstanding shares of Common Stock after the reverse stock split, may be lower than the total market capitalization before the reverse stock split. Moreover, the number of authorized shares of Common Stock will not be proportionately reduced by the reverse stock split. This will allow for more shares to be available for issuance. Accordingly, the reverse stock split will have the effect of increasing the authorized, but unissued shares of Common Stock as a percentage of total authorized shares. Following the reverse stock split, if effected, the Board of Directors will have the authority, subject to applicable securities laws, to issue all authorized and unissued shares without further stockholder approval, upon such terms and conditions as the Board of Directors deems appropriate.
Impact of the Proposed Reverse Stock Split If Effected
The reverse stock split would affect all of the Company’s stockholders uniformly and would not affect any stockholder’s ownership percentage or proportionate voting power (subject to the treatment of fractional shares). The other principal effects of the reverse stock split will be that:
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the number of issued and outstanding shares of Common Stock will be reduced proportionately based on the final reverse stock split ratio as determined by the Board of Directors;
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the number of shares reserved for issuance, any maximum number of shares with respect to which equity awards may be granted to any participant and the number of shares and any exercise price subject to awards outstanding under the Company’s equity-based compensation plans will be adjusted proportionately based on the final reverse stock split ratio such that the number of shares reserved for issuance and the number of shares subject to such limits shall be reduced and any applicable exercise price shall be increased; and
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the reverse stock split will likely increase the number of stockholders who own odd lots (less than 100 shares). Stockholders who hold odd lots may experience an increase in the cost of selling their shares and may have greater difficulty in executing sales.
Although the number of outstanding shares of Common Stock would decrease following the proposed reverse stock split, the Board of Directors does not intend for the reverse stock split to be the first step in a “going private transaction” within the meaning of Rule 13e-3 of the Securities Exchange Act of 1934.
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No Fractional Shares
Stockholders will not receive fractional post-reverse stock split shares in connection with the reverse stock split. Instead, resulting fractional shares will be rounded up to the next whole share.
Effect on Registered and Beneficial Stockholders
Upon the reverse stock split, we intend to treat stockholders holding shares of Common Stock in “street name” (that is, held through a brokerage firm, bank, broker-dealer, or other similar organization) in the same manner as registered stockholders whose shares of Common Stock are registered in their names. Brokerage firms, banks, broker-dealers, and other similar organizations will be instructed to effect the reverse stock split for their beneficial holders holding shares of Common Stock in “street name;” however, these organizations may apply their own specific procedures for processing the reverse stock split. If you hold your shares of Common Stock in “street name,” and if you have any questions in this regard, we encourage you to contact your nominee.
Effect on Registered “Book-Entry” Stockholders
The Company’s registered stockholders may hold some or all of their shares electronically in book-entry form. These stockholders will not have stock certificates evidencing their ownership of shares of Common Stock. They are, however, provided with a statement reflecting the number of shares of Common Stock registered in their accounts.
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If you hold registered shares of Common Stock in book-entry form, you do not need to take any action to receive your post-reverse stock split shares of Common Stock in registered book-entry form.
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If you are entitled to post-reverse stock split shares of Common Stock, a transaction statement will automatically be sent to your address of record as soon as practicable after the effective time of the reverse stock split indicating the number of shares of Common Stock you hold.
Effect on Registered Certificated Shares
Some registered stockholders hold their shares of Common Stock in certificate form or a combination of certificate and book-entry forms. If any of your shares of Common Stock are held in certificate form, you will receive a transmittal letter from the Company’s transfer agent as soon as practicable after the effective time of the reverse stock split. The transmittal letter will be accompanied by instructions specifying how you can exchange your certificate representing the pre-reverse stock split shares of Common Stock for a statement of holding. When you submit your certificate representing the pre-reverse stock split shares of Common Stock, your post-reverse stock split shares of Common Stock will be held electronically in book-entry form. This means that, instead of receiving a new stock certificate, you will receive a statement of holding that indicates the number of post-reverse stock split shares of Common Stock you own in book-entry form. The Company will no longer issue physical stock certificates unless you make a specific request for a share certificate representing your post-reverse stock split ownership interest.
Beginning at the effective time of the reverse stock split, each certificate representing pre-reverse stock split shares will be deemed for all corporate purposes to evidence ownership of post-reverse stock split shares.
Accounting Consequences
The par value per share of the Common Stock will remain unchanged after the reverse stock split. As a result, on the effective time of the reverse stock split, the stated capital on the Company’s balance sheet attributable to Common Stock will be reduced proportionately based on the final reverse stock split ratio determined by the Board of Directors, from its present amount, and the additional paid-in capital account shall be credited with the amount by which the stated capital is reduced. After the reverse stock split, net income or loss per share, and other per share amounts, will be increased because there will be fewer shares of Common Stock outstanding. In future financial statements, net income or loss per share and other per share amounts for periods ending before the reverse stock split would be recast to give retroactive effect to the reverse stock split.
As described above under “Impact of the Proposed Reverse Stock Split If Effected,” the exercise price of options under the 2013 Plan will be proportionately adjusted based on the final reverse stock ratio. The Company does not anticipate that any other accounting consequences would arise as a result of the reverse stock split.
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No Appraisal Rights
Stockholders will not have dissenters’ or appraisal rights under Delaware corporate law or under the Company’s Certificate of Incorporation in connection with the proposed reverse stock split.
Procedure for Effecting Reverse Stock Split
If the stockholders approve Proposal 4 and the Board of Directors effects the reverse stock split, the reverse stock split will become effective at such time as is specified in the amendment to the Company’s Certificate of Incorporation, which is referred to as the effective time of the reverse stock split. Beginning at the effective time of the reverse stock split, each certificate representing pre-reverse stock split shares of Common Stock will be deemed for all corporate purposes to evidence ownership of post-reverse stock split shares of Common Stock.
Certain U.S. Federal Income Tax Consequences of the Reverse Stock Split
The following discussion is a general summary of certain United States of America (“U.S.”) federal income tax consequences of the reverse stock split that may be relevant to holders of Common Stock that hold such stock as a capital asset for federal income tax purposes. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder, administrative rulings and judicial decisions as of the date hereof, all of which may change, possibly with retroactive effect, resulting in U.S. federal income tax consequences that may differ from those discussed below. This discussion does not address all aspects of federal income taxation that may be relevant to such holders in light of their particular circumstances or to holders that may be subject to special tax rules, including, without limitation: (i) holders subject to the alternative minimum tax; (ii) banks, insurance companies, or other financial institutions; (iii) tax-exempt organizations; (iv) dealers in securities or commodities; (v) regulated investment companies or real estate investment trusts; (vi) partnerships (or other flow-through entities for U.S. federal income tax purposes and their partners or members); (vii) traders in securities that elect to use a mark-to-market method of accounting for their securities holdings; (viii) U.S. Holders (as defined below) whose “functional currency” is not the U.S. dollar; (ix) persons holding Common Stock as a position in a hedging transaction, “straddle,” “conversion transaction” or other risk reduction transaction; (x) persons who acquire shares of Common Stock in connection with employment or other performance of services; and (xi) U.S. expatriates. In addition, this summary does not address the tax consequences arising under the laws of any foreign, state or local jurisdiction and U.S. federal tax consequences other than federal income taxation. If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds shares of Common Stock, the tax treatment of a holder that is a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership.
We have not sought, and will not seek, an opinion of counsel or a ruling from the Internal Revenue Service (“IRS”) regarding the U.S. federal income tax consequences of the reverse stock split, and there can be no assurance the IRS will not challenge the statements and conclusions set forth below or that a court would not sustain any such challenge.
EACH HOLDER OF COMMON STOCK SHOULD CONSULT SUCH HOLDER’S TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT TO SUCH HOLDER.
For purposes of the discussion below, a “U.S. Holder” is a beneficial owner of shares of Common Stock that for U.S. federal income tax purposes is: (1) an individual citizen or resident of the U.S.; (2) a corporation (including any entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the U.S., any state thereof or the District of Columbia; (3) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (4) a trust, the administration of which is subject to the primary supervision of a U.S. court and as to which one or more U.S. persons have the authority to control all substantial decisions of the trust, or that has a valid election in effect to be treated as a U.S. person. A “Non-U.S. Holder” is a beneficial owner (other than a partnership) of shares of Common Stock who is not a U.S. Holder.
U.S. Holders
A U.S. Holder generally should not recognize gain or loss upon such holder’s exchange of pre-split shares of Common Stock for post-split shares of Common Stock pursuant to the reverse stock split. A U.S. Holder’s aggregate tax basis in the shares of Common Stock received pursuant to the reverse stock split should equal the aggregate tax basis of the shares of Common Stock surrendered, and such U.S. Holder’s holding period in the shares of Common Stock received should include the holding period in the shares of Common Stock surrendered.
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Treasury regulations promulgated under the Code provide detailed rules for allocating the tax basis and holding period of the shares of Common Stock surrendered to the shares of Common Stock received pursuant to the reverse stock split. Holders of shares of Common Stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.
Non-U.S. Holders
Non-U.S. Holders who exchange shares of Common Stock pursuant to the reverse stock split generally should be subject to tax in the manner described above under “U.S. Holders.”
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE REVERSE STOCK SPLIT AND CORRESPONDING CHANGE TO THE CERTIFICATE OF INCORPORATION.
STOCKHOLDERS SHOULD NOT DESTROY ANY SHARE CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO DO SO.