Note

– Equity and Stock-Based Compensation

Under the Second Amended and Restated Certificate of Incorporation of the Successor Company, it has the authority to issue a total of

32,500,000

shares of capital stock, consisting of: (i)

31,500,000

shares of New Common Stock and

1,000,000

shares of preferred stock, par value

$0.0001

per share, which will have such rights, powers and preferences as the board of directors of the Company (the “Board of Directors”) shall determine.

In accordance with the Plan, as of the Effective Date, the Company issued

7,500,000

shares of New Common Stock to the Recapitalization Investors for gross cash proceeds of

$7,300,000

and net cash to the Company of

$7,052,500,

which is referred to as the Recapitalization Financing.

The net cash amount excludes the effect of

$100,000

in offering expenses paid from the proceeds of the DIP Financing, which was converted into Series A Preferred Stock as of the Effective Date.

A significant majority of the Recapitalization Investors executed Backstop Commitments to purchase up to

12,800,000

additional shares of New Common Stock for an aggregate purchase price of up to

$3,000,000.

The Company c

ould

not

call the Backstop Commitment prior to

June 30, 2017. (

see Note

–

Subsequent Events

for additional details.)

With respect to each Recapitalization Investor who executed a Backstop Commitment, the commitment would have terminated on the earlier of (i) the date on which the Company received net proceeds (after deducting all costs, expenses and commissions) from the sale of New Common Stock in the aggregate amount of the Backstop Commitment, (ii) the date that all shares of Series A Preferred Stock (as defined below) had been redeemed by the Company, or (iii) the date that all shares of Series A Preferred Stock were

longer owned by entities affiliated with Deerfield

(“Termination Date”). Under the terms of the Backstop Commitment, the Company would have been obligated to pay to the committed Recapitalization Investors a commitment fee of

$250,000

in the aggregate upon the Termination Date.

Under the Plan of Reorganization, the Company committed to the issuance of up to

3,000,000

shares of New Common Stock, and subsequently issued

2,264,612

shares of New Common Stock (the “Exchange Shares”) on the Effective Date to record holders of the Old Common Stock as of

March 28, 2016,

who executed and timely delivered the required release documents

later than

July 5, 2016,

in accordance with the Confirmation Order and the Plan.

The holders of Old Common Stock who executed and timely delivered the required release documents are referred to as the “Releasing Holders.”

The

2,264,612

Exchange Shares were issued as of the Effective Date to Releasing Holders who asserted ownership of a number of shares of Old Common Stock that matched the Company

’s records or could otherwise be confirmed, at a rate of

one

share of New Common Stock for every

41.8934

shares of Old Common Stock held by such holders as of

March 28, 2016.

In accordance with the Plan, if the calculation would otherwise have resulted in the issuance to any Releasing Holder of a number of shares of New Common Stock that is

not

a whole number, then the number of shares actually issued to such Releasing Holder was determined by rounding down to the nearest number.

June 20, 2016,

the Company issued

162,500

shares of New Common Stock (the “Administrative Claim Shares”) pursuant to the Order Granting Application of the Ad Hoc Equity Committee Pursuant to

U.S.C. §§

503

(b)(

)(D) and

503

(b)(

) for Allowance of Fees and Expenses Incurred in Making a Substantial Contribution, entered by the Bankruptcy Court on

June 20, 2016.

The Administrative Claim Shares were issued to holders of administrative claims under sections

503

(b)(

)(D) and

503

(b)(

) of the Bankruptcy Code. Of the

162,500

shares,

100,000

shares were issued to outside counsel to the Ad Hoc Equity Committee of the Company’s equity holders as compensation of all remaining allowed fees for legal services provided by such counsel. The remaining

62,500

were issued to designees of the Ad Hoc Equity Committee who had granted loans in an aggregate amount of

$62,500

to the Ad Hoc Equity Committee in

December 2015

as repayment of such loans.

Successor Company Stock Purchase Warrants

As part of the Recapitalization Financing, the Company also issued Warrants to purchase

6,180,000

shares of unregistered New Common Stock to certain of the Recapitalization Investors. The Warrants terminate on

May 5, 2021

and are currently exercisable at exercise prices ranging from

$0.50

per share to

$1.00

per share.

The number of shares of New Common Stock underlying a Warrant and its exercise price are subject to customary adjustments upon subdivisions, combinations, payment of stock dividends, reclassifications, reorganizations and consolidations. The Warrants are classified in equity.

Successor Company Series A Preferred Stock

On the Effective Date, the Company filed a Certificate of Designations of Series A Preferred Stock with the Delaware Secretary of State, designating

29,038

shares of the Company

’s undesignated preferred stock, par value

$0.0001

per share, as Series A Preferred Stock (the “Series A Preferred Stock”). On the Effective Date, the Company issued

29,038

shares of Series A Preferred Stock to Deerfield in accordance with the Plan pursuant to the exemption from the registration requirements of the Securities Act provided by Section

1145

of the Bankruptcy Code. Deerfield did

not

receive any shares of New Common Stock or other equity interests in the Company.

The Series A Preferred Stock has

stated maturity date, is

not

convertible or redeemable, and carries a liquidation preference of

$29,038,000,

which is required to be paid to holders of such Series A Preferred Stock before any payments are made with respect to shares of New Common Stock (and other capital stock that is

not

issued on parity or senior to the Series A Preferred Stock) upon a liquidation or change in control transaction.

For so long as Series A Preferred Stock is outstanding, the holders of Series A Preferred Stock have the right to nominate and elect

one

member of the board of directors of the Company (the “Board of Directors”) and to have such director serve on a standing committee of the Board of Directors established to exercise powers of the Board of Directors in respect of decisions or actions relating to the Backstop Commitment. The Series A Preferred Stock has voting rights, voting with the New Common Stock as a single class, with each share of Series A Preferred Stock having the right to

five

votes, which currently represents approximately

one

percent (

) of the voting rights of the capital stock of the Company. The holders of Series A Preferred Stock have the right to approve certain transactions and incurrences of debt. Among other restrictions, the Certificate of Designations for our Series A Preferred Stock limits the Company’s ability to (i) issue securities that are senior or pari passu with the Series A Preferred Stock, (ii) incur debt other than for working capital purposes

not

in excess of

$3.0

million, (iii) issue securities that are junior to the Series A Preferred Stock and that provide certain consent rights to the holders of such junior securities in connection with a liquidation or contain certain liquidation preferences, (iv) pay dividends on or purchase shares of its capital stock, and (v) change the authorized number of members of its Board of Directors to a number other than five, in each case without the consent of holders representing at least

two

-thirds of the outstanding shares of Series A Preferred Stock. The Series A Preferred Stock is classified in equity.

Stock-Based Compensation

Predecessor Company

The Company

’s

2002

Long-Term Incentive Plan (“LTIP”) and

2013

Equity Incentive Plan (“EIP” and, together with the LTIP, the “Incentive Plans”) permitted the awards of stock options, stock appreciation rights, restricted stock, phantom stock, performance units, dividend equivalents, and other stock-based awards to employees, directors and consultants. We were authorized to issue up to

10,500,000

shares of Old Common Stock under the LTIP, and up to

18,000,000

shares of Old Common Stock under the EIP (as approved by our shareholders on

June 9, 2014).

All stock options granted under the Incentive Plans were cancelled in their entirety as of the Effective Date.

As of

May 4, 2016,

the Company only issued stock options under the Incentive Plans. Stock option terms were determined by the Board of Directors for each option grant, and options generally vested immediately upon grant or over a period of time ranging up to

four

years, were exercisable in whole or installments, and expired

longer than

ten

years from the date of grant. There were

stock options granted or exercised for

the

three

months ended

June 30, 2016.

As a result of the cancellation of all outstanding stock options and the application of fresh start accounting as of the Effective Date, unrecognized compensation costs related to the stock options outstanding as of

May 4, 2016,

are

not

recognized after the Effective Date.

Successor Company

July 2016,

the Board of Directors approved, and on

August 4, 2016,

the Board amended, the Company

’s

2016

Omnibus Incentive Plan (the

“2016

Omnibus Plan”) to include an evergreen provision, intended to increase the maximum number of shares issuable under the Omnibus Plan on the

first

day of each fiscal year (starting on

January 1, 2017)

by an amount equal to

six

percent (

) of the shares reserved as of the last day of the preceding fiscal year, provided that the aggregate number of all such increases

may

not

exceed

1,000,000

shares. As of

November 21, 2016,

the Majority Stockholders executed a written consent adopting and approving the

2016

Omnibus Plan, as amended and restated, which provides for the Company to grant equity and cash incentive awards to officers, directors and employees of, and consultants to, the Company and its subsidiaries. We were authorized to issue up to

1,590,000

and

1,500,000

shares of common stock under the

2016

Omnibus Plan as of

June 30, 2017

and

December 31, 2016,

respectively.

A summary of stock option activity under the

2016

Omnibus Plan as of

June 30, 2017,

and changes during the

six

months ended

June 30, 2017,

is presented below:

Stock Options – 2016 Omnibus Plan	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

Outstanding at December 31, 2016		1,265,000		$	1.00		9.51	$	-
Granted		56,250		$	1.67		10.00	$	-
Exercised		-
Forfeited or expired		(92,500	)					$	-
Outstanding at June 30 , 2017		1,228,750		$	1.03		9.05	$	-
Exercisable at June 30 , 2017		450,832		$	1.00		9.01	$	-
Vested and expected to vest at June 30, 2017		1,228,750		$	1.03		9.05	$	-

There were

33,750

and

56,250

stock options granted under the

2016

Omnibus Plan during the

three

and

six

months ended

June 30, 2017,

respectively. The fair value of stock options granted and vested during

2017

was approximately

$8,500

and

$24,500,

respectively.

stock options were exercised during the

six

months ended

June 30, 2017.

As of

June 30, 2017,

there was approximately

$110,000

of total unrecognized compensation cost related to non-vested stock options, and that cost was expected to be recognized over a weighted-average period of

1.07

years.

The Company recorded stock-based compensation expense in the periods presented as follows:

	Successor		Successor		Predecessor
	Six Months ended June 30, 2017		Period from May 5, 2016 through June 30, 2016		Period from January 1, 2016 through May 4, 2016

Sales and marketing	$	2,514	$	-	$	18,504
Research and development		6,223		-		6,858
General and administrative		19,234		-		29,719
	$	27,971	$	-	$	55,081

	Successor		Successor		Predecessor
	Three Months ended June 30, 2017		Period from May 5, 2016 through June 30, 2016		Period from April 1, 2016 through May 4, 2016

Sales and marketing	$	1,392	$	-	$	4,959
Research and development		3,112		-		1,914
General and administrative		7,659		-		8,677
	$	12,163	$	-	$	15,550