STANDBY EQUITY DISTRIBUTION AGREEMENT (SEDA): NICHE CAPITAL RAISING TOOL FUELING GROWTH FOR SMALL AND MID-CAP

COMPANIES
A CAPITAL RAISING DILEMMA Easy, low cost access to capital is essential to drive growth for small and mid-cap companies. While the capital markets offer a range of options, public companies have generally been left with a tough choice because typical options that raise equity capital threaten to dilute shareholders and potentially saddle companies with restrictive and often expensive terms. The financial crisis has brought this challenge into sharper focus. According to an Ernst & Young survey of public and private companies at the end of 2009, almost one-third of respondents said that inadequate access to capital was impeding their companies ability to grow. In addition, 42% of respondents felt that although capital is available, its too expensive. THE SEDA: A SOLUTION The financial crisis highlights the value of a Standby Equity Distribution Agreement (SEDA), which is a niche capital raising tool often used by small and mid-cap companies. Simply described, the SEDA is a type of equity line that allows a company the right, but not the obligation, to raise funds in tranches in exchange for the issue of new equity over a defined commitment period. This allows the company to raise capital by selling shares as needed or when market conditions are favorable. Additionally, the company often negotiates a floor below which stock cannot be sold, providing a safety net during a downturn. The investor is obligated to buy shares under the agreement regardless of economic environment and companies can cancel the SEDA at any time without additional cost. The obvious benefits to the SEDA are the flexibility to raise funds in incremental amounts and to increase a companys shareholder base in a controlled and measured way. In addition, as discussed further below, both the fixed and variable costs associated with SEDAs tend to be lower than those associated with other means of capital raising and they tend to put fewer restrictions on the issuer; thus, simply having access to the SEDA offers companies a competitive edge. The SEDA has been an appealing solution to the capital raising dilemma for companies in a wide range of industries. Since 2009, over 90 SEDA deals have closed with companies in the healthcare, mining, oil & gas, real estate, manufacturing & shipping and technology sectors.
IMPORTANT DISCLOSURES: The information contained herein is for informational purposes only and is not intended to be, nor shall it be, construed as legal, tax or investment advice or as an offer, or the solicitation of any offer, to buy or sell any securities. Before making an investment in any security, you should thoroughly review with your legal, tax and investment advisors to determine whether an investment is suitable for you in light of your investment objectives and financial situation.

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SEDAs By Sector*
Healthcare Mining Oil & Gas Other Real Estate Manufacturing & Shipping Technology

*Represents SEDAs closed since January 1, 2009

Companies in all corners of the globe have entered into SEDAs. In the last few years, the SEDA has been well received especially in the UK and in the Asia Pacific Region. In addition to the US, Canada and countries in Western Europe such as France and Spain, the SEDA has a far reach across several continents and has been utilized in countries such as Israel, South Africa, Norway and Poland.

SEDAs By Geography*

Australia Canada Israel Poland Scandanavia Singapore South Korea United Kingdom United States Western Europe Other

*Represents SEDAs closed since January 1, 2009

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An interesting point to note is the size of companies that are employing the SEDA as a capital raising tool. Historically, SEDAs have appealed primarily to smaller-cap companies with troubled balance sheets; however, in light of current market conditions bigger companies have been utilizing SEDAs. The average market cap of companies using SEDAs has increased from $75 million in 2009 to $130 million through 2011. The steady evolution of larger companies utilizing the SEDA has proven that SEDAs are being implemented as a smart capital raising option rather than a decision of last resort. The SEDAs recent popularity across geographies, sectors and sizes of companies can most likely be attributed to its structure and the benefits that this capital raising tool offers over other means of capital raising. THE SEDA: BACKGROUND AND STRUCTURE In the early and mid 1990s a small number of underwriters began to offer equity lines which were characterized as an exotic capital raising technique. Issuers were generally confined to micro-cap companies listed on the Over-the-Counter Bulletin Boards. The sophistication of equity lines increased throughout the late 1990s and in 2001, the SEDA was pioneered by Mark Angelo, Founder and Managing Member of Yorkville Advisors. In short, the SEDA is a form of equity line which allows a public company as the issuer to raise additional capital by selling, from time to time and at its sole discretion, newly issued shares of its stock to an investor (generally a fund managed by Yorkville Advisors). The investor is contractually obligated to purchase the equity on specified terms at a specified price subject to certain conditions. When negotiating the SEDA, the investor works with the issuer and legal counsel to structure the transaction to ensure flexibility and fast access to capital. The major factors that are considered when putting the SEDA in place include: The total amount of equity the investor commits to purchase; Parameters of SEDA usage including the maximum size of each advance or tranche; Purchase price determinations, including any floor price; and Costs.

Commitment Amount and Limitations: The total amount of equity the investor commits to purchase is called the commitment amount. The commitment amount is generally expressed in U.S. dollars or local currency, but is sometimes expressed in shares. After the SEDA is signed and any conditions have been met, the issuer can sell shares to the investor according to the terms of the agreement. The issuers sale is initiated by an advance notice indicating the portion of the commitment amount it wants to sell to the investor. During the SEDA negotiations, the issuer and investor agree to a maximum advance size which is often calculated based on the issuers recent trading volume at the time of the advance. The aggregate value of advances requested by the issuer can never exceed the commitment amount and the size of a specific advance can never exceed the maximum advance amount. The maximum advance amount is intended to reflect the amount of stock that can be sold in a short period of time immediately following an advance notice without having a significant negative impact on the price of the issuers stock. As such, a properly negotiated maximum advance amount protects both the investor and the issuer.
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Price Determinations: After the issuer delivers an advance notice, a pricing period takes place to determine the price at which the investor will purchase the stock. The pricing period and the purchase price are negotiated terms and vary depending on the issuer. The standard pricing period is a five to ten trading day period that begins the trading day after the investor receives notice of the advance. The purchase price of the stock is generally calculated as a discount to the stocks lowest volumeweighted average price or VWAP during the pricing period. At the end of the pricing period, the investor purchases a number of shares of the issuers stock equal to the advance divided by the purchase price. The investor generally sells these shares promptly as permitted by market conditions and deal terms. Some SEDAs also contain a negotiated ability to include a floor price, or minimum acceptable price or MAP in an advance. Specific MAP provisions vary, but generally they allow an issuer to indicate the price below which it does not wish to sell stock. If the issuers stock falls below this price during the pricing period, the advance is adjusted according to the specific terms of the SEDA. The MAP offers protection to issuers that are concerned with issuing shares in a down market. Costs: The fixed costs of the SEDA include both the issuers and investors legal fees and the investors due diligence fees. Generally the issuer is responsible for their own fees and a negotiated portion of the investors legal and due diligence fees. THE SEDA: ADVANTAGES The success of the SEDA as a capital raising tool can be attributed to the benefits it offers over other means of capital raising. Some advantageous features of the SEDA are described below: Flexible size and timing of cash advances; Access to capital throughout the duration of the SEDA; Low implementation costs; and Few restrictive covenants and conditional restraints.

Flexibility: In other forms of equity capital raising, an issuer must often introduce the full amount of the offering to the market at one time and regardless of market conditions, thereby increasing the likelihood of dilution or issue stock to an underwriter who is merely obligated to use its best efforts to resell the stock thereby increasing the likelihood that the issuer will not receive the full amount of capital it has requested. Furthermore, in other forms of equity capital raising there is often a delay between the time the stock is sold and the time it is introduced to the market, this delay can further hinder the issuers capital raising efforts if the price is no longer reflective of current market conditions. Compared to other forms of equity capital raising, the SEDA gives the issuer the right, but not the obligation to sell its stock to the investor in tranches at a current market price. This feature allows the issuer the flexibility to tailor the size and timing of its advances to current market conditions and capital needs. This guaranteed access to limited amounts of capital, makes the SEDA a useful instrument to issuers who wish to avoid dilution and either do not need large capital infusions or can anticipate their future capital needs.

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Access: Once the SEDA is in place, all conditions precedent to an advance have been met and relevant covenants have been maintained, the investor is bound to purchase shares pursuant to the SEDA. This allows the issuer access to funds over the life of the SEDA without identifying and negotiating with an underwriter each time capital is needed. Particularly in a difficult economic environment, this guaranteed access to capital can be used as leverage when dealing with lenders and third parties and can also provide comfort to the issuers shareholders, creditors and counterparties that the issuer will have the means to enhance their business and meet financial obligations. Low Cost: For several reasons, SEDAs are often less costly to implement compared to other alternative capital raising structures. First, the presence of a single investor significantly decreases any costs associated with printing and mailing a prospectus or offering memorandum. Second, a single investor eliminates the need (and associated costs) of a marketing road show. Finally, the streamlined SEDA structure simplifies negotiations, which reduces due diligence costs and legal fees, and saves time. Once the fixed costs associated with implementing the SEDA are incurred, the variable costs are generally structured into the purchase price determination and tend to be lower than those associated with alternative capital raising structures because the investor often bears less risk than an underwriter would in other alternative capital raising structures. For example, when the SEDA is put in place, the investor (i) knows the maximum amount of capital it will be required to fund in any given pricing period, (ii) is able to resell the equity at its discretion (generally immediately), and (iii) generally purchases the shares at a discounted rate regardless of market or other conditions affecting the issuer. Fewer Restraints: Generally the SEDA imposes fewer restrictions on an issuer because the investor is subject to less risk then an underwriter in alternative capital raising structures. Among other things, the SEDA does not generally restrict how the issuer uses proceeds, impose leverage ratios or require the issuer to maintain certain cash levels and will not require an issuer to reach revenue or similar targets. In addition, although it is common for the SEDA to restrict an issuers ability to issue equity during a pricing period, it will usually not limit the issuers ability to raise additional capital or incur debt. THE SEDA: A CONCLUSION The SEDA is a simple, flexible, innovative and effective capital raising tool that serves as a method for public companies to opportunistically raise growth capital from the equity markets. If properly structured and used with regard to current market conditions, the SEDA is an inexpensive, nonrestrictive way to raise capital without incurring excessive dilution. As such, the SEDA is well suited to enhance and manage liquidity while ensuring a guaranteed source of funding regardless of market conditions.

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ABOUT YORKVILLE ADVISORS, LLC Yorkville Advisors, LLC is a US-based alternative investment manager. Founded in January 2001 by Mark Angelo, Yorkville specializes in providing flexible, innovative debt and equity investments and financing in publicly listed companies in a variety of sectors including healthcare, mining, oil & gas, real estate, manufacturing & shipping and technology. Yorkville tailors its transactions on an investment by investment basis, which may include debt and equity investments, bridge financings, asset backed or SEDA backed notes, equity facilities and, in some cases, straight equity participation. FOR ADDITIONAL INFORMATION PLEASE CONTACT Investor Relations P: 201.985.8300 Email: InvestorRelations@yorkvilleadvisors.com

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