Cogentix Medical, Inc.
COGENTIX MEDICAL INC /DE/ (Form: DEF 14A, Received: 10/11/2016 16:03:01)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A
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the Securities Exchange Act of 1934
 
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Cogentix Medical, Inc.
(Name of Registrant as Specified in its Charter)

Not Applicable
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Cogentix Medical, Inc.
5420 Feltl Road
Minnetonka, Minnesota 55343

October 11, 2016

Dear Stockholders:

On behalf of the Board of Directors of Cogentix Medical, Inc., a Delaware corporation (the “Company,” “we,” “us” or “our), we cordially invite you to join us for a special meeting of stockholders of the Company, to be held on Thursday, November 3, 2016, at 8:30 a.m., Central Daylight Time, at the Company’s headquarters at 5420 Feltl Road, Minnetonka, MN 55343. At the meeting, we will discuss and vote on the matters described in the accompanying notice and proxy statement. Please read these proxy materials with care.

It is important that your shares be represented at the meeting, regardless of the number of shares you hold. Accordingly, please ensure your shares are voted at the meeting by completing, signing, dating and returning the enclosed proxy card, or by following the Internet or telephone voting instructions as described in the accompanying proxy statement, or by following the voting instructions on the Notice Regarding the Availability of Proxy Materials you received for the meeting.

On behalf of the Company’s Board of Directors and management, it is my pleasure to express our appreciation for your support.

Sincerely,

Darin Hammers
President and Chief Executive Officer
 
Your vote is important. Please ensure your shares will be voted at the meeting as soon as possible by completing, signing, dating and returning the enclosed proxy card, or by following the Internet or telephone voting instructions as described in the accompanying proxy statement.  By doing so, you may save us the expense of additional solicitation.
 
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    NOTICE OF SPECIAL MEETING OF
STOCKHOLDERS TO BE HELD ON THURSDAY, NOVEMBER 3, 2016

To the Stockholders of Cogentix Medical, Inc.:

A Special Meeting of the Stockholders of Cogentix Medical, Inc., a Delaware corporation, will be held on Thursday, November 3, 2016, at 8:30 a.m., Central Daylight Time, at the Company’s headquarters at 5420 Feltl Road, Minnetonka, MN 55343, to consider and vote on the following proposals:

Proposal 1: A proposal to approve, as required by and in accordance with NASDAQ Rule 5635(b), the issuance of 16,129,033 shares of common stock, par value $0.01 per share, of the Company (the “Common Stock”), at a purchase price per share of $1.55, on the terms and subject to the conditions set forth in the Securities Purchase Agreement, dated as of September 7, 2016 (the “Purchase Agreement”), between the Company and Accelmed Growth Partners, L.P., a Cayman Island exempted limited partnership (the “Investor” or “Accelmed”).

Proposal 2: A proposal to approve, as required by and in accordance with NASDAQ Rule 5635(b), the exchange of all the outstanding principal amount of and accrued interest on the promissory notes made by the Company and purchased by Lewis C. Pell for shares of Common Stock, at a price per share of $1.67, on the terms and subject to the conditions set forth in the Note Exchange Agreement, dated as of September 7, 2016 (the “Note Exchange Agreement”), between the Company and Mr. Pell . Assuming the closing of the Note Exchange Agreement occurs on November 3, 2016, Mr. Pell will be issued 17,688,423 shares of Common Stock thereunder.

Proposal 3: A proposal to permit the Company’s Board of Directors to adjourn the Special Meeting, if necessary or appropriate, to solicit additional proxies in favor of the foregoing proposals if there are not sufficient votes to approve the proposals.

Only stockholders of record at the close of business on September 23, 2016 will be entitled to notice of, and to vote at, the meeting and any adjournments or postponements thereof. A stockholder list will be available at the Company’s corporate offices beginning 10 days prior to the date of the meeting during normal business hours and at the special meeting during the whole time thereof for examination by any stockholder for any purpose germane to the meeting.

We cordially invite all stockholders to attend the special meeting in person. However, regardless of whether you plan to attend the special meeting in person, we urge you to complete, sign and date the enclosed proxy card and return it promptly in the envelope provided . No postage is required if you mail the proxy in the United States. Stockholders who attend the special meeting may revoke their proxy and vote their shares in person.
 
ii

 
By Order of the Board of Directors,
   
 
Darin Hammers
 
President and Chief Executive Officer
October 11, 2016
 
Minnetonka, Minnesota
 
 
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TABLE OF CONTENTS
 
 
Page
   
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43

As used in this proxy statement, references to the “Company,” “we,” “us,” “our” and similar references refer to Cogentix Medical, Inc. and our consolidated subsidiaries, and the term “Common Stock” refers to our common stock, par value $0.01 per share.
 
5420 Feltl Road
Minnetonka, Minnesota 55343

 
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
 
TO BE HELD
ON
THURSDAY,
NOVEMBER 3,
2016
 
This proxy statement and the enclosed proxy card are being mailed to stockholders on or about September 23, 2016 and are furnished in connection with the solicitation of proxies by the Board of Directors of Cogentix Medical, Inc. (or, if applicable, a committee thereof) (the “Board” or “Board of Directors”) for use at a special meeting of stockholders (the “Special Meeting”) to be held on, Thursday, November 3, 2016 at 8:30 am, Central Daylight Time, at the Company’s headquarters at 5420 Feltl Road, Minnetonka, MN 55343 , and at any adjournments or postponements thereof.

This proxy statement summarizes the information you need to know to vote at the Special Meeting. You do not need to attend the Special Meeting to vote your shares. Instead, you may vote your shares by marking, signing, dating and returning the enclosed proxy card, or by following the Internet or telephone voting instructions as described herein, or by following the voting instructions on the Notice Regarding the Availability of Proxy Materials you received for the meeting .

Important Notice Regarding
the Availability of
Proxy Materials for the
Stockholder Meeting to Be
Held on Thursday, November 3,
2016

This proxy statement is available at
www.proxyvote.com
 
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND RELATED MATTERS
 
Why am I receiving these materials? What is the purpose of the Special Meeting?

The Company sent you this proxy statement and the proxy card on behalf of the Board of Directors, which is soliciting a proxy from you to vote your shares at the Special Meeting. This proxy statement contains information designed to assist you in voting your shares.

On September 7 , 2016, the Company and the Investor entered into the Purchase Agreement, pursuant to which the Company has agreed to sell to the Investor, and the Investor has agreed to purchase from the Company, 16,129,033 shares of Common Stock for an aggregate purchase price of $25 million, reflecting a purchase price per share of $1.55 (rounded up to the nearest whole share).  In connection with the Purchase Agreement, the Company also entered into the Note Exchange Agreement with Lewis C. Pell, one of the Company’s Class I directors, pursuant to which, among other things, all the outstanding principal amount of and accrued interest on the promissory notes made by the Company and purchased by Mr. Pell will be exchanged for shares of Common Stock, at a price per share of $1.67.  Assuming the closing of the Note Exchange Agreement occurs on November 3, 2016, Mr. Pell will be issued 17,688,423 shares of Common Stock thereunder.  In connection with the entry into the Purchase Agreement and Note Exchange Agreement, Mr. Pell and the Investor entered into a voting agreement on September 7, 2016 and, immediately prior to the closing of the Purchase Agreement, the Company, the Investor and Mr. Pell will enter into a registration rights agreement (collectively, with the transactions contemplated thereunder and under the Purchase Agreement and the Note Exchange Agreement, the “Proposed Transaction”). As described in more detail below, in accordance with the terms of the Purchase Agreement and applicable rules, regulations and guidance of The NASDAQ Stock Market LLC (“NASDAQ”), the Company is calling the Special Meeting to consider and vote on the proposals to approve the issuances of shares of Common Stock in connection with the Proposed Transaction.

At the Special Meeting, holders of our Common Stock will be asked to consider and vote on the following proposals:

1.
To consider and vote on a proposal to approve the issuance of 16,129,033 shares of Common Stock to the Investor,  at a purchase price per share of $1.55, on the terms and subject to the conditions set forth in the Purchase Agreement.

2.
To consider and vote on a proposal to approve the exchange of all the outstanding principal amount of and accrued interest on the promissory notes made by the Company and purchased by Mr. Pell for shares of Common Stock, at a price per share of $1.67, on the terms and subject to the conditions set forth in the Note Exchange Agreement, between the Company and Mr. Pell.  Assuming the closing of the Note Exchange Agreement occurs on November 3, 2016, Mr. Pell will be issued 17,688,423 shares of Common Stock thereunder.

3.
To approve the adjournment, if necessary or appropriate, of the Special Meeting to solicit additional proxies in favor of the foregoing proposals, if there are not sufficient votes to approve the proposals.

How does the Board recommend that I vote?

The Board unanimously recommends that the Company’s stockholders vote “FOR” Proposals 1, 2 and 3.

Why is the Company seeking approval of the Proposed Transaction?
 
We are required to seek approval of the Proposed Transaction pursuant to the terms of the Purchase Agreement. In addition, the Company’s Common Stock is listed on NASDAQ and, as a result, the Company is subject to certain NASDAQ listing rules and regulations. NASDAQ Rule 5635(b) requires stockholder approval prior to any issuance of securities when the issuance will result in a change of control of the Company, which NASDAQ deems to occur when, as a result of the issuance, an investor owns, or has the right to acquire, 20% or more of the outstanding shares of our Common Stock or voting power and such ownership would be the single largest ownership position in the Company. In exchange for the Investor’s $25 million investment in the Company, the Investor will receive 16,129,033 shares of our Common Stock at the closing of the Purchase Agreement, representing approximately 60.76% of our Common Stock outstanding prior to the issuance, and in exchange for the cancellation of the indebtedness held by Mr. Pell,  Mr. Pell will receive 17,688,423 shares of our Common Stock (assuming the closing of the Note Exchange Agreement occurs on November 3, 2016), representing approximately 66.64% of our Common Stock outstanding prior to the issuance.  The foregoing calculations assume that 26,544,299 shares of Common Stock are issued and outstanding, which is the number of shares issued and outstanding as of the record date.  After giving effect to the Proposed Transaction, the shares issued to the Investor pursuant to the Purchase Agreement will represent 26.72% of the Company’s issued and outstanding shares of Common Stock, and the shares issued to Mr. Pell pursuant to the Note Exchange Agreement will represent 29.30% of the Company’s issued and outstanding shares of Common Stock (assuming, in each case, that the closing of the Proposed Transaction occurs on November 3, 2016 and based in part on the number of shares of Common Stock outstanding as of the record date). Accordingly, we must obtain stockholder approval of the issuance of the shares pursuant to the Proposed Transaction.

Who is the Investor?

The Investor is the largest pure play medical device fund in Israel. The Investor focuses on global investments in mature companies that might serve as a platform to Israeli companies to create leading growing specialty medical device companies. The Investor manages over $250 million invested in medical devices.

Who are the Accelmed Directors?

In connection with the entry into the Purchase Agreement, Mr. Pell and the Investor entered into a voting agreement (the “Voting Agreement”), pursuant to which, among other things, the parties thereto have agreed to vote any shares of Common Stock controlled or owned by them as directed by the terms of the Voting Agreement.  Each of Mr. Pell and the Investor has agreed to vote their shares of Common Stock for the other party’s nominees to the Board and each of Mr. Pell and the Investor are entitled to nominate two directors.  The nominees of the Investor, collectively referred to herein as the “Accelmed Directors,” are expected to be appointed as members of the Board upon the closing of the Proposed Transaction. The initial nominees of Mr. Pell are Mr. Pell and Howard Zauberman, who are each current directors, and the Accelmed Directors are Dr. Uri Geiger and Mr. Nachum Shamir.

Dr. Uri Geiger.  Age 48.  Dr. Geiger is Managing Partner of Accelmed, a private equity investment firm he co-founded in 2009 that is focused on medical device companies.  Prior to that, Dr. Geiger served as the CEO of Exalenz Bioscience Ltd., a medical technology company, from May 2006 until December 2008. Prior to that, Dr. Geiger co-founded and was the CEO of GalayOr Networks, a developer of optical components from 2001 until 2003. Dr. Geiger has also served as the founding partner of Dragon Variation Fund, one of Israel’s first hedge funds, since 2000. Prior to returning to Israel in 1999, he gained a broad understanding and experience in capital markets working on Wall Street. Dr. Geiger was formerly an adjunct professor at Tel Aviv University’s Recanati School of Business where he lectured on private equity and venture capital and authored the books “Startup Companies and Venture Capital” and “From Concept to Wall Street”.   Dr. Geiger previously served on the board of directors of EndoChoice Holdings Inc. from January 2014 until March 2016.  Dr. Geiger earned his doctorate from New York’s Columbia University Center for Law & Economics, with a concentration in global equity markets.  Dr. Geiger also served as a major (Ret.) in the Israeli Air force.
 
Nachum (Homi) Shamir . Age 62.  Mr. Shamir currently serves as the President and Chief Executive Officer of Luminex Corporation, a publically traded biotechnology company based in Austin, Texas, a position he has held since October 2014.  Prior to joining Luminex, Mr. Shamir was the President, Chief Executive Officer and Director of Given Imaging Ltd. (“Given”), a developer, manufacturer and marketer of diagnostic products for the visualization and detection of disorders of the gastrointestinal tract which was acquired by Covidien PLC in early 2014 .  Mr. Shamir held this position from April 2006 to June 2014.  Mr. Shamir currently serves on the board of directors of Luminex Corporation and has been serving in such position since October 2014. Mr. Shamir previously served on the board of directors of Given from April 2006 to June 2014.  Mr.  Shamir holds a Bachelor of Science from the Hebrew University of Jerusalem and a Masters of Public Administration from Harvard University.

What will happen if the Company’s stockholders do not approve the Proposed Transaction?

If the Company’s stockholders do not approve the Proposed Transaction, then the issuance of shares of Common Stock to the Investor pursuant to the Purchase Agreement and the exchange of Mr. Pell’s outstanding promissory notes for shares of Common Stock pursuant to the Note Exchange Agreement will not become effective. Pursuant to the Purchase Agreement, the Company will also be required to pay a termination fee of $500,000 to the Investor if the Company’s stockholders do not approve the Proposed Transaction by December 22, 2016.  If the Company is required to pay this $500,000 termination fee, then the Company will not be required to reimburse the Investor’s fees and expenses that would otherwise be required to be reimbursed if the Purchase Agreement is terminated under certain other circumstances or if the Proposed Transaction is consummated (up to a $400,000 cap).

Who is Entitled to Vote at the Special Meeting?

Our stockholders of record at the close of business on September 23, 2016 will be entitled to notice of and to vote at the Special Meeting or any adjournment or postponement of the Special Meeting. As of the record date, 26,544,299 shares of our Common Stock were issued and outstanding. Each share of our Common Stock is entitled to one vote on each matter to be voted on at the Special Meeting.

How Do I Vote My Shares?

Your vote is important. Whether you hold shares directly as a stockholder of record or beneficially in “street name” (through a broker, bank or other nominee), you may vote your shares without attending the Special Meeting. You may vote by granting a proxy or, for shares held in street name, by submitting voting instructions to your broker or nominee.

If you are a stockholder whose shares are registered in your name, you may vote your shares in person at the meeting by attending the Special Meeting or by completing, signing, dating and mailing the enclosed proxy card in the envelope provided.

If your shares are held in street name, you will receive a separate voting instruction form from your broker or bank. Please follow the voting instructions on the enclosed voting instruction form to vote by Internet, telephone, or by mail.
 
The deadline for voting by telephone or on the Internet is 11:59 p.m., Eastern Daylight Time, on Wednesday, October 26, 2016. Please see the enclosed proxy card or the voting instruction form your bank, broker or other holder of record provided to you for more information on your options for voting.

If you return your signed proxy card or use the Internet or telephone voting before the Special Meeting, the named proxies will vote your shares as you direct.
        
What Does It Mean If I Get More Than One Proxy Card?

It means you hold shares registered in more than one account. Sign and return all proxy cards to ensure that all your shares are voted.

How Many Shares Must Be Present to Hold the Special Meeting?

The presence at the Special Meeting, in person or by proxy, of the holders of one-third of all of the issued and outstanding shares of our Common Stock as of the record date will constitute a quorum for the transaction of business at the Special Meeting. In general, shares of Common Stock represented by a properly signed and returned proxy card marked “FOR,” “AGAINST” or “ABSTAIN” with respect to at least one proposal will be counted as shares present and entitled to vote at the Special Meeting for purposes of determining a quorum. The Special Meeting may be adjourned to any other time and any other place by the stockholders present or represented at the meeting and entitled to vote even when such stockholders do not constitute a quorum. It is not necessary to send a new notice of meeting to the stockholders in conjunction with an adjournment of the meeting for 30 days or less if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, our Company may transact any business which might have been transacted at the original meeting.

What Vote is Required for Each Proposal?

The affirmative vote of a majority of the votes cast by the holders of the Company’s Common Stock at the Special Meeting is required to approve Proposals 1, 2 and 3. All votes will be tabulated by the inspector of election appointed for the Special Meeting. Abstentions and “broker non-votes” with respect to Proposals 1, 2 or 3 will not be counted as votes cast on such Proposal. Accordingly, abstentions and “broker non-votes” will have no effect on the outcome of the voting on Proposals 1, 2 or 3.

A “broker non-vote” is a proxy returned by a broker on behalf of its beneficial owner customer with respect to shares held in a fiduciary capacity (generally referred to as being held in “street name”) that are not voted on a particular matter because voting instructions have not been received by the broker from the customer and the broker does not have discretionary voting power for that particular matter .  Because none of the proposals to be considered at the meeting is considered to be “discretionary” under applicable stock exchange rules, it is not anticipated that there will be any “broker non-votes” at the Special Meeting.

Who Will Count the Votes?

We currently expect that Broadridge Corporate Issuer Solutions will tabulate the votes, and an independent third party inspector of elections will be appointed by the Board of Directors to be our inspector of elections for the Special Meeting.
 
May I revoke my proxy?

Yes. Each stockholder giving a proxy has the power to revoke it at any time before the shares it represents are voted by giving written notice of the revocation to our Secretary, by delivering a later-dated proxy (which automatically revokes the earlier proxy), by submitting a proxy again by telephone, via fax or via the Internet or by voting in person at the Special Meeting. Attendance at the Special Meeting will not, by itself, constitute revocation of a previously granted proxy.  If you hold your shares through a broker, bank or other nominee, you may revoke your proxy by following the instructions your broker, bank or other nominee provides.
 
Who Do I Contact if I Have Questions Regarding the Special Meeting?

If you have any questions or require assistance in voting your shares of Common Stock, please call our proxy solicitor, The Proxy Advisory Group, LLC®, toll free at 844-997-7699 or 844-99PROXY.

How Will Business Be Conducted at the Special Meeting?

The presiding officer at the Special Meeting will determine how business at the meeting will be conducted.
 
OVERVIEW

Approval of the Proposed Transaction

Background of the Proposed Transaction; Reasons for Recommendation

Over a period of the past four years, when the Company had experienced liquidity concerns, Lewis C. Pell, a Class I director, had loaned money to the Company evidenced by the following promissory notes convertible into shares of Common Stock:  the convertible promissory note, dated September 19, 2012, in the principal amount of $20 million; the convertible promissory note, dated September 25, 2013, in the principal amount of $3.5 million; and the convertible promissory note, dated June 16, 2014, in the principal amount of $4.990 million (as amended from time to time, collectively, the “Notes”).

On December 21, 2014, the Company (then-named Vision-Sciences, Inc.) entered into an Agreement and Plan of Merger with Uroplasty, Inc., a Minnesota corporation (“Uroplasty”), providing for the merger of Uroplasty with and into a wholly owned subsidiary of the Company (the “Merger”).  Concurrently therewith, the Notes were amended to extend their maturity dates effective upon the completion of the Merger on March 31, 2015.  As amended, the Notes provided that they would be subordinated to any future loans reasonably approved by Mr. Pell and incurred by the Company to finance certain strategic initiatives.

In August 2014, the Company engaged Capital Advisors Group (“CAG”) to assist the Company in locating a source of debt financing.  During March and April 2015, CAG approached approximately twelve lenders that CAG believed would potentially be interested in providing long-term financing to the Company.  The Company directly approached one potential lender. Eight lenders executed non-disclosure agreements and reviewed financial information regarding the Company.  The Company received formal term sheets from two lenders (“Lender A” and “Lender B”) interested in providing up to $25 million in long-term financing to the Company.  The Company also received a verbal indication of interest from one other lender (“Lender C”), who ultimately declined to submit a formal term sheet.

After engaging in discussions with Lender A and Lender B in April and May 2015, the Company determined to proceed with a $25 million long-term loan with Lender A.  In June and July 2015, the Company and Lender A negotiated the terms of the proposed new loan.  While substantial agreement was reached between representatives of the Company and Lender A on certain material terms of the new loan, Mr. Pell did not agree with certain terms of the new loan and the anticipated use of the proceeds and, accordingly, was not willing to subordinate the Notes to the new loan upon the proposed terms.  Lender A ultimately declined to proceed with the proposed loan.

In August 2015, CAG reinitiated contact with potential long-term lenders (including Lender B and Lender C) to determine whether they were still interested in providing debt financing to the Company. Based on discussions with Mr. Pell, the Company did not believe that Mr. Pell would approve the anticipated terms of such new loans, and, as a result, the Company determined to seek a short-term, asset-based line of credit.  In August 2015, the Company contacted approximately seven lenders that the Company believed would potentially be interested in providing short-term financing to the Company.  Venture Bank, a Minnesota banking corporation (“Venture Bank”) and one other lender submitted written term sheets to provide short-term financing to the Company.

By September 2015, the Company was in urgent need of financing in order to continue to operate its business in the ordinary course and Venture Bank was the only remaining lender willing to provide short-term debt financing without requiring that Mr. Pell subordinate the Notes.  Mr. Pell was also in agreement with the other terms of the proposed loan. On September 18, 2015, the Company entered into a loan agreement with Venture Bank, providing the Company with a committed $7 million secured revolving credit facility with a maturity date of March 18, 2017.  Although Mr. Pell did not agree to subordinate the Notes to the Venture Bank loan, the Venture Bank loan provided that the Company would not pay, replace, amend or modify the Notes or make payments on any future promissory notes to Mr. Pell while the Venture Bank loan remained outstanding.
 
Since obtaining the Venture Bank Loan, the Company’s Board and management have continued to evaluate the Company’s options for securing future financing for its day-to-day operations and strategic initiatives, including at several Board meetings with respect thereto.

On December 23, 2015, Mr. Zauberman, the Chairman of our Board, began discussions with RM Global, advisors to Accelmed, regarding Accelmed’s potential interest in investing in the Company.

On January 4, 2016, Mr. Zauberman met with and introduced Uri Geiger, the managing director of Accelmed, to the then-chief executive officer of the Company, during the JP Morgan Chase Healthcare conference in San Francisco. At this meeting, it was agreed that further discussions would be held.

Following these discussions, on June 13, 2016, the Company and Accelmed entered into a confidentiality agreement. The Company’s then-current market price was $0.88.

Representatives of the Company and Accelmed held a preliminary meeting on June 13, 2016 to discuss the potential terms of a transaction between the Company and Accelmed.

On June 17, 2016, the Company engaged Proskauer Rose LLP (“Proskauer”) as outside counsel to the Company in connection with its consideration of a potential transaction with Accelmed.

On June 20, 2016, the Company received a term sheet setting forth the principal terms of a proposed equity investment by Accelmed in the Company.  The term sheet proposed that Accelmed would purchase an aggregate of $25 million of shares of Common Stock at a purchase price of $1.25 per share (the “Proposed Financing”).  As a condition to Accelmed’s investment, the term sheet provided that Mr. Pell would be required to exchange no less than $20 million of the Notes for shares of Common Stock at a price per share of not less than $1.25 (the “Proposed Debt Exchange”).  The term sheet contained certain other terms and conditions proposed by Accelmed, including, among other things, entry into a voting agreement between Accelmed and Mr. Pell to implement certain director nomination rights, amendments to certain provisions of the Company’s Certificate of Incorporation and Bylaws, Board approval under Section 203 of the DGCL, entry into a registration rights agreement and granting Accelmed certain protective provisions and approval rights over M&A transactions, changes in the size of the Board, issuance of certain new indebtedness and amendments to the Certificate of Incorporation or Bylaws.  In the term sheet, Accelmed also requested a 90-day exclusivity period.

On June 22, 2016, the Board held a meeting to consider the proposed term sheet, with representatives of Proskauer in attendance.  As part of the discussion, the Board considered the financial and other aspects of the Proposed Financing, including the Proposed Debt Exchange.  The Board discussed the difficulties with the Company’s previous attempts to secure financing on terms and conditions that were advantageous to the Company and acceptable to Mr. Pell, as the Company’s principal creditor.  The Proskauer representatives then provided the Board with an overview of the material terms proposed by Accelmed in the draft term sheet and advised the Board on their fiduciary duties in connection with the Proposed Transaction.  With the Proskauer representatives, the Board also considered the potential conflict of interest that Mr. Pell may have in evaluating Accelmed’s proposal due to the requirement in the term sheet that he exchange at least a portion of the Notes in connection with the Proposed Financing.  After discussion, the Board determined to establish a special committee (the “Special Committee”) of independent directors, consisting of James A. D’Orta, Cheryl Pegus and Kenneth A. Samet, to negotiate and approve (or not approve) the Proposed Debt Exchange.   The Special Committee was also delegated authority to engage its own legal and financial advisors to assist it with evaluating the Proposed Debt Exchange.
 
On June 24, 2016, the Special Committee held a meeting to interview a representative of Richards, Layton & Finger, P.A. (“Richards Layton”), to act as its independent legal counsel in connection with the Proposed Transaction and, following such interview, determined to engage Richards Layton.

On July 1, 2016, the Special Committee held a meeting with representatives of Richards Layton to consider the process of evaluating the Proposed Debt Exchange and to interview financial advisor candidates.  The Special Committee discussed the authority that they had been delegated by the Board.  At the meeting, the Special Committee determined to seek a broader delegation of authority from the Board to review, evaluate, negotiate and approve (or not approve) all aspects of the Proposed Transaction (including the price per share of the Proposed Financing and the terms and conditions of the Proposed Debt Exchange).  The Special Committee also determined that the Company’s ability to proceed with the Proposed Transaction should be conditioned on the receipt of a favorable recommendation of the Proposed Transaction by the Special Committee.

Also at the meeting, the Special Committee interviewed two potential financial advisor candidates.  After consideration of the potential candidates, the Special Committee determined to retain Duff & Phelps, LLC (“Duff & Phelps”) as its independent financial advisor.  In selecting Duff & Phelps, the Special Committee considered, among other things, its reputation as a nationally recognized financial advisor, its experience generally in M&A transactions and specifically in the context of advising special committees of boards of directors of public companies, its experience advising companies in the Company’s industry and the Special Committee’s determination, based on its interview of the Duff & Phelps representatives and in consultation with representatives of Richards Layton, that Duff & Phelps was free of any actual or potential conflicts of interest in connection with the Proposed Transaction.

On July 6, 2016, the Special Committee held a meeting to discuss the Proposed Transaction.  Representatives of Richards Layton and, for portions of the meeting, members of the Company’s management and Proskauer were in attendance.  During the meeting, representatives of Richards Layton advised the members of the Special Committee on their fiduciary duties under Delaware law in connection with their consideration of the Proposed Transaction.  The Special Committee also elected Mr. D’Orta to serve as the chairman of the Special Committee and discussed the proposed engagement letter for Duff & Phelps to serve as the financial advisor to the Special Committee.  In addition, members of the Company’s management team delivered a presentation regarding the Company’s past efforts to secure financing. Later that day, the Company and the Special Committee entered into an engagement letter with Duff & Phelps.  The engagement letter provided that Duff & Phelps would provide financial advisory services to the Special Committee and that Duff & Phelps would, if requested by the Special Committee, opine as to the fairness, from a financial point of view, to the unaffiliated public stockholders of the Company, of (1) the exchange price of the Proposed Debt Exchange and (2) the per share price of the Proposed Financing.

On July 11, 2016, the Board held a meeting to consider, among other things, the Proposed Transaction. During the meeting, the Board also considered and adopted resolutions that expanded the delegation of authority as requested by the Special Committee.
 
On July 14, 2016, the Special Committee held a meeting to discuss the Proposed Transaction, with representatives of Richards Layton and Duff & Phelps in attendance.  During the meeting, Duff & Phelps representatives discussed their preliminary financial analysis regarding the Company, the Proposed Financing and the Proposed Debt Exchange, noting, among other things, that the $1.25 per share proposed price of the Proposed Financing was at a premium to the Company’s then-current market price (of $1.09 as of the close of business on July 14, 2016) and that, based on Duff & Phelps’ preliminary analysis, the fair market value of the Notes was less than the face value of the Notes.  The Special Committee members and their advisors also discussed proposed comments to the initial term sheet submitted by Accelmed.  Among other things, the Special Committee members determined to revise the term sheet to increase the price per share of the Proposed Financing from $1.25 to $1.75, add the ability for the Company to issue up to $5 million in shares of Common Stock to an additional investor selected by the Company on the same terms as Accelmed, limit the proposed protective provisions and reduce the proposed exclusivity period from 90 days to 45 days.  The Special Committee also determined to revise the term sheet to clarify that the Proposed Transaction was subject to prior approval by the Special Committee.  The Special Committee considered whether to seek to require that the Proposed Transaction be subject to approval of a majority of the Company’s disinterested stockholders. Later that day, the Company’s management delivered to Accelmed a revised term sheet reflecting the comments discussed by the Special Committee at the meeting.

On July 15, 2016, Accelmed delivered a revised term sheet to the Company.  Accelmed accepted many of the Special Committee’s proposed changes to the term sheet, but requested a meeting between Accelmed’s business principals and the Special Committee to discuss the pricing of the Proposed Financing.  Accelmed also requested a right of first refusal to purchase the additional $5 million in shares of Common Stock that the Company proposed to issue to the additional investor.

On July 18, 2016, representatives of Proskauer and Richards Layton had a phone conversation with representatives of Pepper Hamilton LLP, outside counsel to Accelmed (“Pepper Hamilton”), to discuss the revised term sheet.  During the call, Pepper Hamilton advised that Accelmed would not agree to conditioning approval of the Proposed Financing on the approval of a majority of the Company’s disinterested stockholders.

On July 20, 2016, the Special Committee met with representatives of Richards Layton and Duff & Phelps to discuss the Proposed Transaction and the revised term sheet.  Members of the Company’s management were also present for portions of the meeting at the request of the Special Committee.  The Duff & Phelps representatives delivered a presentation to the Special Committee regarding their financial analysis and views with respect to the value of the Company, the Proposed Financing and the Proposed Debt Exchange.  The Duff & Phelps representatives also discussed the methodology used to estimate the fair market value of the Notes.  The Richards Layton representatives and the members of the Company’s management team reported to the Special Committee regarding the negotiations that had occurred between the Company and Accelmed about the term sheet.  After discussion, the Special Committee authorized and directed Mr. D’Orta, in his capacity as chairman of the Special Committee, to negotiate directly with Accelmed regarding the pricing of the Proposed Financing and with Mr. Pell regarding the Proposed Debt Exchange. The Special Committee also requested that Duff & Phelps prepare supplemental materials regarding the Proposed Debt Exchange, which supplemental materials were provided to the Special Committee on July 22, 2016.  These supplemental materials included an analysis of publicly traded debt securities to determine an appropriate yield to use to value the Notes, as well as a valuation of the Notes and a sensitivity table for purposes of assisting with the Special Committee’s evaluation of the Proposed Debt Exchange.

On July 21, 2016, Richards Layton sent a mark-up of the revised term sheet to Accelmed reflecting changes discussed by the Special Committee and its advisors, including, among other things, the deletion of Accelmed’s right of first refusal on the additional investor’s right to purchase up to $5 million in shares of Common Stock.  Later that day, representatives of Proskauer and Richards Layton had a phone conversation with representatives of Pepper Hamilton to discuss the revised term sheet and Mr. D’Orta and Darin Hammers, the Company’s President and Chief Executive Officer, had a phone conversation with Dr. Uri Geiger, the Managing Director of Accelmed, to negotiate the pricing of the Proposed Financing.  As a result of these discussions, Accelmed agreed to increase the price per share of its $25 million equity investment from $1.25 to $1.50.
 
Also on July 21, 2016, Mr. D’Orta had a conversation with Mr. Pell regarding the Proposed Debt Exchange.  During the discussions, Mr. D’Orta proposed that Mr. Pell exchange the Notes at an exchange price of $2.50 per share to adjust for the differential between the face value of the Notes and the estimated fair market value of the Notes.  The $2.50 per share exchange price implied that the Notes were worth 40% less than the face value of the Notes.  Such proposal was later confirmed in an email communication sent by Richards Layton on July 22, 2016.

On July 25, 2016, Mr. Pell notified Mr. D’Orta that he did not agree with the Special Committee’s proposal and countered with a proposal to exchange $25 million face value of the Notes at an exchange price that would reflect a 5% discount to the face value of the Notes and subsequent exchange of the Notes for shares of Common Stock at $1.50 per share.

On July 28, 2016, the Special Committee held a meeting to discuss the Proposed Transaction, with representatives of Richards Layton and Duff & Phelps present at the meeting.  Members of the Company’s management were also present for portions of the meeting at the request of the Special Committee.  Members of the Company’s management discussed the presentation that had been given to the members of the Special Committee during the earlier ad hoc meeting on July 28, 2016 regarding management’s recommendations with respect to the Proposed Debt Exchange.  Mr. Hammers advised the Special Committee that, based on the Company’s current and projected financial situation, it appeared unlikely that the Company would be able to repay the Notes in full before they became due.  He also discussed the impediment that the Notes had posed in the Company’s past attempts to obtain debt financing.  Based on the foregoing and taking into account Mr. Pell’s proposal to exchange the Notes at a 5% discount, the Special Committee discussed management’s recommendation to exchange approximately $25 million of the Notes at an exchange ratio that would reflect a 10% discount to the face value of the Notes, which would be equivalent to the exchange of $25 million face value of the Notes for shares of Common Stock at a price of $1.67 per share.  The Company’s management team also advised the Special Committee that it viewed the Proposed Transaction, as a whole, as being in the best interests of the Company and its stockholders due to, among other things, the above-market proposed purchase price of the Proposed Financing and the substantial reduction in the Company’s indebtedness.  The Special Committee and its advisors discussed the state of negotiations with Mr. Pell and the Special Committee’s desire not to jeopardize the Proposed Financing, including the view of the Special Committee and Duff & Phelps that the Proposed Transaction, as a whole, was very attractive to the Company.  After discussion with Duff & Phelps with respect to its financial analyses of the Proposed Debt Exchange, on the one hand, versus the Proposed Transaction as a whole, on the other hand, and given Accelmed’s requirement that the Proposed Financing be conditioned on the Proposed Debt Exchange, the Special Committee and Duff & Phelps agreed that Duff & Phelps would analyze the Proposed Transaction, as a whole, instead of analyzing each of the Proposed Debt Exchange and the Proposed Financing separately.  The Special Committee authorized Mr. D’Orta to engage with Mr. Pell to seek to obtain Mr. Pell’s acceptance of a higher implied discount to the face value of the Notes based on an exchange at $1.67 per share.

On July 29, 2016, Mr. D’Orta and representatives of Richards Layton had a conversation with Mr. Geiger regarding the Proposed Financing.  During that meeting, Mr. Geiger confirmed that Mr. Pell’s agreement to exchange at least $20 million of the Notes into shares of Common Stock at a price per share not less than the price per share of the Proposed Financing was a firm requirement to Accelmed’s willingness to enter into the Proposed Financing. Later that day, Mr. D’Orta also had a conversation with Mr. Pell and proposed that Mr. Pell agree to exchange $25 million of the Notes at an exchange price that would reflect a 15% discount to the face value of the Notes.  Mr. Pell did not agree with the Special Committee’s proposal, but indicated that he would consider submitting a revised proposal with respect to the Proposed Debt Exchange.  Representatives of the Company subsequently unsuccessfully sought to obtain Mr. Pell’s agreement to an exchange reflecting a 15% discount to the face value of the Notes.
 
On August 1, 2016, Mr. Pell delivered a written response to the Special Committee’s proposal, in which he indicated that he would not be willing to exchange the Notes at an exchange price of greater than $1.67 per share, or the equivalent of a 10% discount to the face value of the Notes and an exchange at $1.50 per share. Later that day, the Special Committee held a meeting with representatives of Richards Layton, Duff & Phelps and, for portions of the meeting, the Company’s management to discuss Mr. Pell’s proposal with respect to the Proposed Debt Exchange and potential alternatives thereto.  The Company’s management advised the Special Committee that they believed Mr. Pell’s offer to exchange the Notes at a $1.67 exchange price was his best and final offer and that they did not believe Accelmed would be willing to proceed with the Proposed Financing if Mr. Pell did not agree to exchange the Notes.  The Duff & Phelps representatives advised the Special Committee that, based on their preliminary analysis, Duff & Phelps would be able to deliver a favorable opinion with respect to the fairness, from a financial point of view, of the Proposed Transaction as a whole.  After discussion, the Special Committee authorized and directed its advisors to revise the term sheet to include the exchange of $25 million in face value of the Notes at an exchange price of $1.67 per share.

Following the meeting of the Special Committee, the Company and Duff & Phelps executed an amendment to Duff & Phelps’ engagement letter to provide that Duff & Phelps would analyze and provide a fairness opinion with respect to the fairness, from a financial point of view, to the unaffiliated public stockholders of the Company of the financial terms of the Proposed Transaction as a whole.

After market close on August 2, 2016, the Company released its financial results for the second quarter ended June 30, 2016.

On August 3, 2016, Richards Layton sent to Pepper Hamilton a revised version of the term sheet.

During this time period, Mr. Pell expressed a desire to exchange the full amount of his debt (approximately $29.4 million in principal and interest at the time) instead of $25 million.

On August 4, 2016, the Special Committee held a meeting with the representatives of Richards Layton and Duff & Phelps to consider the revised term sheet for the Proposed Transaction, which contemplated a $25 million equity investment by Accelmed at a purchase price of $1.50 per share and the exchange by Mr. Pell of $25 million in face value of the Notes at an exchange price of $1.67 per share.  The Duff & Phelps representatives made a presentation to the Special Committee regarding the fairness, from a financial point of view, of the terms of the Proposed Transaction and confirmed that, if requested by the Special Committee, Duff & Phelps could render a favorable fairness opinion based on the terms of the Proposed Transaction.  Mr. Hammers, who attended portions of the meeting at the request of the Special Committee, discussed the financial and strategic importance of the Proposed Transaction to the Company and confirmed his recommendation that the Special Committee approve the terms of the Proposed Transaction as set forth in the revised term sheet.  After further discussion, the Special Committee unanimously adopted resolutions approving the revised term sheet for the Proposed Transaction and recommending that the full Board approve the revised term sheet and direct it to be submitted to Accelmed.

Following the meeting of the Special Committee, Mr. Pell reaffirmed his desire to exchange the full amount of his debt, including all accrued interest, instead of $25 million in face value.  Accelmed also expressed an interest in having the Company have no outstanding debt following the Proposed Transaction.  Discussions took place among Messrs. D’Orta, Hammers, Pell and Geiger on August 5 and 6, 2016, during which it was negotiated that Accelmed would increase the purchase price of the Proposed Financing from $1.50 per share to $1.55 per share in exchange for the Company and Mr. Pell agreeing to the exchange of all of the principal amount and accrued interest on the Notes, totaling approximately $29.4 million at the time, into shares of Common Stock at an exchange price of $1.67 per share.  During this time period, Mr. D’Orta communicated with the other members of the Special Committee and Richards Layton with respect to the negotiations.
 
On August 8, 2016, Richards Layton sent to Pepper Hamilton a revised version of the term sheet reflecting the changes discussed by the parties.

On August 9, 2016, the Special Committee held a meeting to consider the revised proposal for the Proposed Transaction, which contemplated that Accelmed would make a $25 million equity investment at a purchase price of $1.55 per share and Mr. Pell would exchange all of the principal amount of and accrued interest under the Notes into shares of Common Stock at an exchange price of $1.67 per share.  Also present at the meeting at the request of the Special Committee were representatives of Richards Layton and Duff & Phelps as well as members of the Company’s management (for a portion of the meeting).  The Duff & Phelps representatives made a presentation to the Special Committee regarding the fairness, from a financial point of view, of the revised terms of the Proposed Transaction and confirmed that, if requested by the Special Committee, Duff & Phelps could render a favorable fairness opinion based on the terms of the Proposed Transaction.  Mr. Hammers advised the Special Committee that management considered the revised terms of the Proposed Transaction to be in the best interests of the Company and recommended that the Special Committee approve the Proposed Transaction.  After further discussion, the Special Committee unanimously adopted resolutions approving the revised terms of the Proposed Transaction and recommending that the full Board approve the revised term sheet and direct it to be submitted to Accelmed.

Immediately following the adjournment of the meeting of the Special Committee, the Board, with representatives of Proskauer in attendance, met to consider the revised terms of the Proposed Transaction and the Special Committee’s recommendation to the Board with respect thereto.  The Proskauer representatives reviewed the material terms of the Proposed Transaction with the Board and advised the Board members on certain questions related thereto.  After consideration of the recommendation of the Special Committee and the revised terms of the Proposed Transaction, the Board unanimously adopted resolutions approving the revised term sheet and directing the Company’s management to submit the revised term sheet to Accelmed.  Later that day, the revised term sheet was delivered to Accelmed and the term sheet was executed by the parties as of August 8, 2016.

Commencing on August 10, 2016, representatives of Proskauer, Richards Layton and Pepper Hamilton negotiated the terms of the Purchase Agreement as well as the Note Exchange Agreement, the Registration Rights Agreement and the Voting Agreement. The Note Exchange Agreement contemplated the exchange of the Notes as well as the cancellation of all of Mr. Pell’s outstanding warrants for no consideration.

On August 10, 2016, Pepper Hamilton delivered an initial draft of the Purchase Agreement to Proskauer and Richards Layton.  Among other things, the initial draft of the Purchase Agreement did not permit the Company to solicit or discuss alternative proposals with third parties and did not permit the Board or the Special Committee to change its recommendation with respect to the Proposed Transaction post-signing.

On August 15, 2016, Proskauer sent comments on the initial draft of the Purchase Agreement to Pepper Hamilton.  Among other things, the comments narrowed the scope of the proposed representations and warranties and interim operating covenants, limited the proposed closing conditions, termination rights of Accelmed and indemnification rights, and included comments provided by Richards Layton to the no solicitation provision.  Such comments would permit the Company to negotiate with respect to unsolicited offers and, under certain circumstances, permit the Board or Special Committee to change its recommendation with respect to the Proposed Transaction and to terminate the Purchase Agreement to enter into an agreement with respect to a superior proposal.
 
On August 19, 2016, Pepper Hamilton sent a revised draft of the Purchase Agreement to Proskauer and Richards Layton in which Accelmed, among other things, rejected the Company’s proposals with respect to the closing conditions, termination rights, indemnity provision and no solicitation provision.

On August 23, 2016, representatives of Proskauer, Richards Layton and Pepper Hamilton met telephonically to discuss the terms of the Purchase Agreement.  Among the issues discussed by the parties were the closing conditions, the no solicitation provision, the size of and circumstances under which termination fees would be payable by the Company and the proposed indemnity provisions.  Following the call, Proskauer sent comments on the revised draft of the Purchase Agreement to Pepper Hamilton, which reinstated the Company’s originally proposed no solicitation provision, but provided Accelmed with three business days to match any superior proposal before the Board or Special Committee could change its recommendation or terminate the Purchase Agreement for a superior proposal.

On August 24 and 25, 2016, Pepper Hamilton provided a revised draft of the Purchase Agreement to Proskauer and Richards Layton.  Pepper Hamilton’s revised draft proposed a more constrained no solicitation provision that limited the circumstances in which the Company could discuss unsolicited proposals and change its recommendation as well as removing the Company’s ability to terminate the Purchase Agreement to enter into a superior proposal. The revised draft also proposed a termination fee in the amount of $2.5 million if the Purchase Agreement was terminated due to a change of recommendation by the Board or the Special Committee.

On August 26, 2016, representatives of Proskauer and Pepper Hamilton had a telephonic conversation regarding the terms of the Purchase Agreement, including the closing conditions and termination rights of the parties based on the accuracy of the representations and warranties set forth in the Purchase Agreement.  Later that day, Pepper Hamilton sent a revised draft of the Purchase Agreement to Proskauer and Richards Layton, proposing changes based on that discussion.

On August 29, 2016, representatives of Proskauer, Richards Layton and Pepper Hamilton met telephonically to discuss the terms of the Purchase Agreement, including the Company’s representations and warranties, the no solicitation provision, the size of the termination fee, certain conditions to closing and the indemnity provision.  After the call, representatives of Proskauer sent written comments on the Purchase Agreement to Pepper Hamilton proposing changes based on the issues discussed during the call.

On August 30, 2016, Messrs. Hammers and Geiger and representatives of Proskauer, Richards Layton and Pepper Hamilton met telephonically to negotiate certain remaining open issues in the Purchase Agreement.    Later that day, representatives of Pepper Hamilton sent a revised draft of the Purchase Agreement to Proskauer and Richards Layton.

On August 30, 2016, Messrs. Pell, Geiger and Hammers met with representatives of the proposed additional investor to gauge interest in its participation in the Proposed Financing.  The proposed additional investor indicated that it would not be willing to invest $5 million subject to the restrictions proposed by Accelmed in the term sheet.

On August 31, 2016, representatives of Pepper Hamilton sent a revised draft of the Purchase Agreement to Proskauer and Richards Layton, reflecting the deletion of the provisions related to the possibility of the additional investor participating in the Proposed Transaction.  Messrs. Hammers and Geiger met telephonically later that day to discuss the amount of the fees and expenses that would be payable by the Company upon termination of the Purchase Agreement and the circumstances under which they would be required to be paid.  Following this discussion, Pepper Hamilton sent a further revised draft of the Purchase Agreement to Proskauer and Richards Layton proposing changes based on the parties’ discussion.
 
On September 1, 2016, Proskauer sent comments on the revised draft of the Purchase Agreement to Pepper Hamilton.  Among other things, the Proskauer draft of the Purchase Agreement revised the no solicitation provision to permit the Company to terminate the Purchase Agreement to enter into a superior proposal and provided that the Company could engage in discussions with third parties and change its recommendation with respect to the Proposed Transaction in a wider variety of circumstances.  Throughout the day, Proskauer and Pepper Hamilton exchanged revised drafts of the Purchase Agreement.  Notwithstanding a change of recommendation by the Board, the Company agreed that it would be required to hold a meeting of the stockholders to consider the Proposed Transaction in exchange for, among other things, a reduction of the termination fee payable by the Company from $2.5 million to $1 million if the Purchase Agreement was terminated by Accelmed following a change of recommendation by the Board or the Special Committee.

Throughout the day on September 1, 2016 and during the morning of September 2, 2016, representatives of Proskauer, Richards Layton and Pepper Hamilton met telephonically to finalize the terms of the Purchase Agreement, the Voting Agreement and the Registration Rights Agreement.

On September 7, 2016, the Special Committee met with representatives of Richards Layton and Duff & Phelps to consider the definitive transaction documents for the Proposed Transaction.  The Richards Layton representatives reviewed the material terms of the definitive transaction documents with the Special Committee and advised the members of the Special Committee with respect to their fiduciary duties in considering and evaluating the Proposed Transaction.  The Duff & Phelps representatives made a presentation to the Special Committee regarding their financial analyses with respect to the Proposed Transaction and delivered a written fairness opinion to the Special Committee that the Proposed Transaction, as a whole, was fair, from a financial point of view, to the Company’s unaffiliated public stockholders.  Messrs. Hammers and Reynolds also attended a portion of the meeting and confirmed management’s recommendation that the Special Committee approve the Proposed Transaction, noting the financial and strategic importance of the Proposed Transaction to the Company.  The Special Committee then adopted resolutions approving the Purchase Agreement and the other documents and transactions contemplated by the Proposed Transaction and recommending them to the full Board.

Immediately following the adjournment of the meeting of the Special Committee, the Board met, with representatives of Proskauer in attendance, to consider the definitive transaction documents the Proposed Transaction and the Special Committee’s recommendation to the Board with respect thereto.  Representatives of Proskauer delivered a presentation to the Board summarizing the material terms of the definitive transaction documents, the negotiation history and a comparison of the terms set forth in the term sheet and those ultimately negotiated in the definitive transaction documents.  After consideration of the recommendation of the Special Committee and the terms of the definitive transaction documents for the Proposed Transaction, the Board unanimously adopted resolutions approving the Purchase Agreement and the other documents and transactions contemplated by the Proposed Transaction.

Opinion of Duff & Phelps, LLC

As discussed above, pursuant to an engagement letter dated July 6, 2016, as amended by an addendum thereto dated August 1, 2016, the Special Committee retained Duff & Phelps, LLC, or Duff & Phelps, to serve as its independent financial advisor and to render an opinion in connection with the Proposed Transaction.  The Special Committee retained Duff & Phelps based on Duff & Phelps’ qualifications, reputation and experience in providing fairness opinions, and its experience in valuing companies, generally, and in the medical device industry, in particular.  Duff & Phelps is a premier global valuation and corporate finance advisor that is regularly engaged to provide financial advisory services, including fairness opinions and valuation advice, in connection with mergers and acquisitions, leveraged buyouts, going-private transactions and recapitalization transactions.
 
In the engagement letter dated July 6, 2016, Duff & Phelps agreed, if requested, to opine as to the fairness, from a financial point of view, to the unaffiliated public stockholders of the Company of the per-share price of the proposed $25 million investment by Accelmed in newly issued shares of Common Stock.  Duff & Phelps also agreed, if requested, to opine as to the fairness, from a financial point of view, to the unaffiliated public stockholders of the Company of the proposed exchange of no less than $20 million of Notes into shares of the Common Stock at a price per share of not less than the share purchase price implied by the proposed investment by Accelmed (without giving effect to any impact of the proposed transaction on any particular stockholder other than in its capacity as a stockholder).  In the addendum dated August 1, 2016, the Special Committee requested that Duff & Phelps analyze the fairness, from a financial point of view, to the unaffiliated public stockholders of the Company, of the financial terms of the Proposed Transaction, as a whole (without considering the fairness of either the investment by Accelmed or the note exchange by Mr. Pell, independently, and without giving effect to any impact of the proposed transaction on any particular stockholder other than in its capacity as a stockholder).

On September 7, 2016, Duff & Phelps delivered a written presentation and its oral opinion, and confirmed in writing, to the Special Committee that, as of that date, and based upon and subject to the assumptions, limitations and qualifications contained in its opinion, (1) the $25 million investment in newly issued shares of Common Stock by Accelmed at a price of $1.55 per share and (2) the exchange by Mr. Pell of $29.5 million in face value of Notes payable by the Company (including $1.0 million of accrued interest) into shares of Common Stock at a price per share of $1.67 per share and the cancellation of all outstanding warrants to purchase Common Stock held by Mr. Pell  (referred to by Duff & Phelps collectively as the “note exchange”), taken as a whole, are fair, from a financial point of view, to the unaffiliated stockholders of the Company.  The Accelmed investment and the note exchange were analyzed on a combined basis for purposes of Duff & Phelps’ analysis and are collectively referred to in their analysis as the “Proposed Transaction.” Duff & Phelps has consented to the reproduction of its opinion in this Proxy Statement.

The full text of Duff & Phelps’ written opinion, dated September 7, 2016, which sets forth, among other things, certain assumptions made, certain matters considered and the limitations on the review undertaken in connection with the Proposed Transaction, is attached as Exhibit A to this proxy statement and is incorporated herein by reference.  We urge you to read Duff & Phelps’ opinion carefully and in its entirety.

Duff & Phelps’ opinion was provided for the information and assistance of the Special Committee in connection with its consideration of the Proposed Transaction and (i) does not address the merits of the underlying business decision to enter into the Proposed Transaction versus any alternative strategy or transaction, (ii) does not address any transaction related to the Proposed Transaction, (iii) is not a recommendation as to how the Special Committee, the Board of Directors or any stockholder should vote or act with respect to any matters relating to the Proposed Transaction, or whether to proceed with the Proposed Transaction or any related transaction; and (iv) does not indicate that the pricing of the Common Stock or the other terms of the Proposed Transaction are the best possibly attainable under any circumstances.  The decision as to whether to proceed with the Proposed Transaction or any related transaction may depend on an assessment of factors unrelated to the financial analysis on which Duff & Phelps’ opinion was based.
 
Duff & Phelps’ opinion was only one of the factors taken into consideration by the Special Committee in making its determination with respect to the Proposed Transaction.  Duff & Phelps’ opinion should not be construed as creating any fiduciary duty on the part of Duff & Phelps to any party.  Duff & Phelps has not undertaken, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring or coming to its attention after the date of its opinion.

The information set forth below summarizes the material financial and comparative analyses performed by Duff & Phelps, but does not purport to be a complete description of the financial analyses performed by Duff & Phelps or the data considered by it in connection with its opinion. The preparation of a financial opinion involves various subjective determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to particular circumstances.  In arriving at its opinion, Duff & Phelps considered a number of analytical methodologies.  Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the strengths, weaknesses and applicability of any particular technique.  While the conclusions reached in connection with each analysis were considered carefully by Duff & Phelps in arriving at its opinion, Duff & Phelps did not consider it practicable to, nor did it attempt to, assign relative weights to the individual analyses and specific factors considered in reaching its opinion.  The conclusion reached by Duff & Phelps was based on all analyses and factors, taken as a whole, and also on application of Duff & Phelps’ own experience and judgment. This conclusion may involve significant elements of subjective judgment and qualitative analysis. No one method of analysis should be regarded as critical to the overall conclusion.   Accordingly, Duff & Phelps believes that its analyses must be considered as a whole, and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the evaluation process underlying its opinion.

In connection with its opinion, Duff & Phelps made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances.  Duff & Phelps also took into account its assessment of general economic, market and financial conditions, as well as its experience in securities and business valuation, in general, and in transactions similar to the Proposed Transaction, in particular.  Duff & Phelps’ procedures, investigations and financial analyses with respect to the preparation of its opinion included, but were not limited to, the following:

1.
Duff & Phelps reviewed the following documents:
 
a.
The Company’s annual reports and audited financial statements on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the year ended March 31, 2015 and for the period April 1, 2015 through December 31, 2015, and the Company’s quarterly report and unaudited interim financial statements on Form 10-Q filed with the SEC for six months ended June 30, 2016;
 
b.
Vision-Sciences, Inc.’s annual reports and audited financial statements on Form 10-K filed with the SEC for the years ended March 31, 2012 through 2014;
 
c.
Uroplasty, Inc.’s annual reports and audited financial statements on Form 10-K filed with the SEC for the years ended March 31, 2012 through 2014;
 
 
d.
Unaudited financial information for the Company for year ended December 31, 2015 and the seven months ended July 31, 2015 and July 31, 2016, respectively;
 
e.
Detailed financial projections prepared by management of the Company for the years ending December 31, 2016 through 2020 (the “Management Projections”);
 
f.
Other internal documents relating to the history, current operations and probable future outlook of the Company provided to Duff & Phelps by management of the Company;
 
g.
Agreement and Plan of Merger dated December 21, 2014 by and among Vision-Sciences, Inc., Visor Merger Sub LLC and Uroplasty, Inc.;
 
h.
Documents related to the Company’s indebtedness, including the Notes between the Company and Lewis C. Pell, as well as a Common Stock purchase warrant by the Company in favor of Mr. Pell dated November 9, 2009 to purchase up to 272,727 shares of the Common Stock, a Common Stock purchase warrant by the Company in favor of Mr. Pell dated November  9, 2009 to purchase up to 378,788 shares of the Common Stock, and a Common Stock purchase warrant by the Company in favor of Mr. Pell dated September 30, 2011 to purchase up to 1,229,105 shares of Common Stock;
 
i.
Documents related to the Proposed Transaction, including the term sheet dated August 8, 2016 between the Company and Accelmed (the “Term Sheet”) and the unsigned execution version of the Purchase Agreement and the Exchange Agreement; and
 
j.
Various presentations and reports prepared by Company management, including debt financing updates presented to the Board of Directors.
 
2.
Discussed the information referred to above and the background and other elements of the Proposed Transaction with the management of the Company and with the Special Committee;
 
3.
Reviewed the historical trading prices and trading volume of the Company’s Common Stock and the publicly traded securities of certain other companies that Duff & Phelps deemed relevant;
 
4.
Performed certain valuation and comparative analyses using generally accepted valuation and analytical techniques, including a discounted cash flow analysis, an analysis of selected public companies and selected transactions that Duff & Phelps deemed relevant, and an analysis of selected publicly traded CCC-rated debt that Duff & Phelps deemed relevant; and
 
5.
Conducted such other analyses and considered such other factors as Duff & Phelps deemed appropriate.
 
No limits were placed on Duff & Phelps by the Company in terms of the information to which it had access or on the matters it could consider in rendering its opinion.
 
In performing its analyses and rendering its opinion with respect to the Proposed Transaction, Duff & Phelps, with the Company’s consent:
 
1.
Relied upon the accuracy, completeness and fair presentation of all information, data, advice, opinions and representations obtained from public sources or provided to it from private sources, including Company management, and did not independently verify such information;
 
2.
Relied upon the fact that the Special Committee, the Board of Directors and the Company have been advised by counsel as to all legal matters with respect to the Proposed Transaction, including that all procedures required by law to be taken in connection with the Proposed Transaction had been duly, validly and timely taken;
 
3.
Assumed that any estimates, evaluations, forecasts and projections furnished to Duff & Phelps, including the Management Projections, were reasonably prepared and based upon the best currently available information and good faith judgment of the person furnishing the same and Duff & Phelps expresses no opinion with respect to the same or the underlying assumptions;
 
4.
Assumed that information supplied and representations regarding the Company and the Proposed Transaction made by management of the Company were substantially accurate;
 
5.
Assumed that the final versions of all documents reviewed by Duff & Phelps in draft form conformed in all material respects to the drafts reviewed;
 
6.
Assumed that there has been no material change in the assets, liabilities, financial condition, results of operations, business or prospects of the Company since the date of the most recent financial statements and other information made available to Duff & Phelps, and that there is no information or facts that would make the information reviewed by Duff & Phelps incomplete or misleading;
 
7.
Assumed that all of the conditions required to implement the Proposed Transaction will be satisfied and that the Proposed Transaction will be completed in accordance with the Definitive Agreement without any amendments thereto or any waivers of any terms or conditions thereof; and
 
8.
Assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Proposed Transaction will be obtained without any adverse effect on the Company or the contemplated benefits expected to be derived from the Proposed Transaction.
 
In Duff & Phelps’ analysis and in connection with the preparation of its opinion, Duff & Phelps also made numerous assumptions with respect to industry performance, general business, market and economic conditions and other matters, many of which are beyond the control of any party involved in the Proposed Transaction.  To the extent that any of the foregoing assumptions or any of the facts on which Duff & Phelps’ opinion is based prove to be untrue in any material respect, its opinion cannot and should not be relied upon.
 
Duff & Phelps prepared its opinion as of September 7, 2016.  Duff & Phelps’ opinion was necessarily based upon market, economic, financial and other conditions as they existed and could be evaluated as of that date, and Duff & Phelps disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting its opinion which may come or be brought to the attention of Duff & Phelps after the date of its opinion.
 
In rendering its opinion, Duff & Phelps is not expressing any opinion with respect to the amount or nature of any compensation to any of the Company’s officers, directors, or employees, or any class of such persons, relative to the consideration to be received by the unaffiliated public stockholders of the Company in the Proposed Transaction, or with respect to the fairness of any such compensation. The issuance of Duff & Phelps’ opinion was approved by an authorized fairness opinion committee of Duff & Phelps.
 
Although these paragraphs include some information in tabular format, those tables are not intended to stand alone and must be read together with the full text of each summary and the limitations and qualifications in Duff & Phelps’ opinion.
 
Summary of Terms of the Notes
 
The terms of the Notes are summarized below:


($ in thousands, except per share values)
                         
Note Payable
   
A
   
B
   
C
Valuation Date
August 31, 2016
 
August 31, 2016
 
August 31, 2016
 
Original Issue Date/Last Amended Date
March 31, 2015
 
March 31, 2015
 
March 31, 2015
 
Expiry Date
March 31, 2020
 
March 31, 2020
 
March 31, 2020
 
Remaining Time to Maturity, years
   
3.58
     
3.58
     
3.58
 
 
                       
Outstanding Notional
 
$
20,006
   
$
3,501
   
$
4,992
 
Annualized Coupon Rate (Simple Interest)
   
0.84
%
   
1.66
%
   
1.91
%
Accrued Interest as of Valuation Date
 
$
696
   
$
122
   
$
174
 
Accumulated Interest as of Maturity Date
 
$
1,246
   
$
340
   
$
538
 
Conversion Price
 
$
6.00
   
$
4.45
   
$
5.55
 
Early Conversion Start Date
March 31, 2018
 
March 31, 2018
 
March 31, 2018
 
Call Feature
  Callable anytime by the Company at Par  
                         
Total Face Value of Notes Outstanding
                 
$
28,499
 
Accrued Interest as of Valuation Date
                   
991
 
Total Face Value of Notes Outstanding Including Accrued Interest
         
$
29,490
 
 
Valuation of Notes
 
Duff & Phelps estimated the value of the Notes using a binomial lattice model. In general, Duff & Phelps analysis included the following steps:
 
Construct a binomial lattice to model the future changes in the common equity value of the Company (the “Equity Lattice”). The Equity Lattice was developed using the Cox-Ross-Rubenstein methodology. Based on this methodology, the potential paths of the future Common Stock value can be modeled as.

Where:
 
S is the Common Stock value as of the valuation date.
 
The magnitude of up (u) and down (d) movements is determined by the equity’s volatility and the length of time increments .
 
These two parameters, along with the risk-free rate, determine the risk-neutral branching probabilities; that is, the probability of the Common Stock value moving up (pu) or down (pd) in the next time period.
 
Construct a convertible bond lattice for the Notes . The convertible bond lattice incorporates the following characteristics:
 
·
The scheduled accrued interest and principal payments.
 
·
The conversion option of the holder.
 
·
The call option of the issuer.
 
Calculate the Notes final payout . The convertible tree payouts at the final nodes of the lattice as the maximum of the conversion values or the principal payments plus accrued but unpaid interest.
 
Rollback value from the maturity date to the valuation date . At each node in the lattice, the value is determined based on a maximization of value from the holder’s perspective (conversion and continuation) and a minimization of value from the Company’s perspective (call option and continuation).
 
The continuation value at each node is a sum of two components:
 
·
The “stock component,” which is discounted at the risk-free rate.
 
·
The “bond component,” which is discounted at the Company’s borrowing rate (risk-free rate + credit spread = total yield)
 
The concluded values of the Notes are the sum of the present values of the stock components and the bond components.
 
Inputs and Assumptions
 
In addition to the terms described above, the following key inputs were applied in Duff & Phelps’ analysis:
 
·
Common Stock price of $1.25 per share, based on a per share value implied by the Proposed Transaction.
 
·
Conversion price of $6.00 per share for the Series A Promissory Note, $4.45 per share for the Series B Promissory Note and $5.55 per share for the Series C Promissory Note.
 
·
Remaining period of the Company’s call option of 3.58 years.
 
·
Coupon rate of 0.84% for the Series A Promissory Note, 1.66% for the Series B Promissory Note and 1.91% for the Series C Promissory Note.
 
·
Risk-free rate of 0.94%, interpolated from the constant maturity Treasury rates as of the valuation date   with the maturity matching the time to the maturity date.
 
·
Dividend yield of 0%.
 
·
Equity volatility of 45% - 60%, based on an analysis of the historical volatility of the Common Stock and the selected public companies (Boule Diagnostics AB, Bovie Medical Corporation, CU Medical Systems, Inc., Ellex Medical Lasers Limited, ITL Ltd., Misonix, Inc., Streamline Health Solutions, Inc., EndoChoice Holdings, Inc., and STAAR Surgical Company).
 
·
Yield range of 14% - 16%, based on Duff & Phelps’ assessment of the Company’s estimated cost of debt for the Notes, as described below.
 
Determination of Note Yield
 
Duff & Phelps identified 15 publicly traded high-yield debt securities to estimate a yield range to value the Notes.  The following table summarizes the term to maturity, debt rating and yield to maturity for each of the debt securities indicated:

Analysis of Selected Comparable Debt Securities

 
Issuer Name
   
Industry Group
   
Term to
Maturity
(years)
   
Debt
Rating
   
Issue Size
($ mil)
   
Current Price
   
Yield to
Maturity
 
                                       
 RCN Telecom Services LLC / RCN Capital Corp
   
Cable & Satellite
     
4.0
   
 CCC+
   
$
105
   
$
106.9
     
6.50
%
 Kinetic Concepts Inc / KCI USA Inc
   
Medical Equipment & Devices
     
3.2
   
 CCC+
     
650
     
102.0
     
11.70
 
 HRG Group Inc
   
Consumer Products
     
5.4
   
 CCC+
     
890
     
103.3
     
6.66
 
 California Resources Corp
   
Exploration & Production
     
3.4
   
 CCC+
     
1,000
     
58.0
     
23.76
 
 Tenet Healthcare Corp
   
Health Care Facilities & Services
     
3.5
   
 CCC+
     
300
     
101.0
     
6.42
 
 Ply Gem Industries Inc
   
Home Improvement
     
5.5
   
 CCC+
     
500
     
104.0
     
5.21
 
 Monitronics International Inc
   
Consumer Services
     
3.6
   
 CCC+
     
585
     
93.9
     
11.24
 
 Cablevision Systems Corp
   
Cable & Satellite
     
3.7
   
 CCC+
     
500
     
104.9
     
6.45
 
 EP Energy LLC / Everest Acquisition Finance Inc
   
Exploration & Production
     
3.7
   
 CCC+
     
2,000
     
65.3
     
24.15
 
 Bill Barrett Corp
   
Exploration & Production
     
3.1
   
 CCC
     
400
     
82.1
     
15.08
 
                                               
            
MEAN:
                     
11.72
%
            
MEDIAN:
                     
8.95
%
                                               
 Immucor Inc
   
Medical Equipment & Devices
     
3.0
   
 CCC-
   
$
400
   
$
95.0
     
13.22
%
 Sears Holdings Corp
   
Department Stores
     
3.4
   
 CCC-
     
625
     
88.0
     
12.55
 
 Cliffs Natural Resources Inc
   
Metals & Mining
     
3.6
   
 CCC-
     
400
     
88.0
     
10.00
 
 Northern Oil and Gas Inc
   
Exploration & Production
     
3.8
   
 CCC-
     
200
     
76.1
     
16.83
 
 Northern Oil and Gas Inc
   
Exploration & Production
     
3.8
   
 CCC-
     
500
     
73.3
     
18.11
 
                                               
            
MEAN:
                     
14.14
%
            
MEDIAN:
                     
13.22
%
                                               
            
Estimated Yield Range:
     
12.00
%
   
13.00
%
            
Liquidity premium:
     
0.50
%
   
1.00
%
            
Accrued Interest premium:
     
0.75
%
   
1.00
%
            
Creditor Preference:
     
0.75
%
   
1.00
%
            
Concluded Yield Range:
     
14.00
%
   
16.00
%
Source: Bloomberg            
 
None of the selected publicly traded high-yield debt securities are directly comparable to the Notes. These securities were selected based on similar terms to maturity and hypothetical credit ratings (CCC+  to CCC-) as the Notes.
 
Duff & Phelps also applied premiums to the yield range derived from the publicly traded debt securities to reflect differences in liquidity, interest payments (accrual vs. current) and the “creditor preference” described below, of the Notes relative to the selected public debt securities.
 
·
Liquidity Premium – The Notes are not publicly traded.  Duff & Phelps estimated that investors would require a higher yield of approximately 50 to 100 basis points relative to the selected publicly traded debt securities to reflect the relative illiquidity of the Notes.
 
·
Accrued Interest Premium – The Notes accrue interest and the payment of interest is not due until March 31, 2020, when the Notes mature. The selected publicly traded debt securities pay current cash interest ( i.e. , every six months). Duff & Phelps estimated that an investor would require a 75 to 100 basis point premium for notes such as the Notes that do not pay accrued interest until maturity.
 
·
Creditor Preference – The Notes could become subordinate to new borrowings by the Company, since the Notes do not prohibit the Company from incurring indebtedness senior to the Notes. For example, the Company was able to obtain a $7 million secured revolving credit facility in September 2015 based upon an eligible borrowing base.  The Company’s ability to incur indebtedness senior to the Notes would create additional risk for an investor in the Notes (the “creditor preference”) relative to the publicly traded debt securities.  Duff & Phelps estimated that the creditor preference would require a 50 to 100 basis point premium relative to the publicly traded debt securities.
 
Based on this analysis, Duff & Phelps estimated a yield range of 14.0% to 16.0%, with a midpoint of 15.0%, which was used as the assumed yield to determine the estimated fair market value of the Notes.
 
Concluded Value of the Notes
 
Based on the analysis and assumptions described above, Duff & Phelps determined that the estimated fair market value of the Notes in aggregate, including accrued interest, was approximately $18.5 million, representing a 37.2% discount to face value.
 
Per Share Value Implied by the Proposed Transaction
 
To determine the implied value of the Proposed Transaction, the value of the Note exchange by Mr. Pell was converted to a fair market value basis.  The exchange price of the Notes was based on the face value of the Notes of $29.490 million (which included  $991,000 of accrued interest).  The negotiated exchange price for the Notes in the Proposed Transaction is $1.67 per share. Dividing the face value of the Notes of  $29.490 million by the exchange price of $1.67 per share results in 17.659 million shares to be received by Mr. Pell.
 
Dividing the estimated fair market value of the Notes of $18.528 million by the 17.659 million shares to be received in the Note exchange results in an implied per share value of $1.05 per share.
 
Notes Exchange
     
(in thousands, except per share values)
     
       
Face Value of Promissory Notes to be Exchanged (1)
 
$
29,490
 
Per Share Exchange Price for Promissory Notes (Face Value Basis) (2)
 
$
1.67
 
Number of Shares Received in Note Exchange
   
17,659
 
         
         
Fair Market Value of Promissory Notes to be Exchanged (3)
 
$
18,528
 
Number of Shares Received in Note Exchange
   
17,659
 
Implied Per Share Value of Note Exchange (FMV Basis)
 
$
1.05
 
 
(1)
Includes $991,000 of accrued interest.
(2)
Based on the Note Exchange Agreement.
(3)
Fair Market Value of Notes, as estimated by Duff & Phelps.

To determine the per share value of the Proposed Transaction, Duff & Phelps aggregated the $25 million in cash from the Accelmed investment with the $18.528 million estimated value of the Notes, and  deducted estimated transaction expenses of approximately $1.3 million, to determine the aggregate equity value of the Proposed Transaction of $42.228 million.
 
The aggregate number of shares to be issued by the Company in the Proposed Transaction was determined by adding the 16.129 million shares to be received by Accelmed (determined by dividing $25 million investment amount by the negotiated price of $1.55 per share), plus the  17.659 million shares to be received by Mr. Pell in the Note Exchange.
 
Dividing the aggregate equity value of the Proposed Transaction of $42.228 million by the 33.788 million new shares issued results in the implied value of the Proposed Transaction of $1.25 per share.
 
Valuation Analysis
 
As part of its analysis, Duff & Phelps’ performed a valuation analysis of the Company using generally accepted valuation methodologies.
 
Discounted Cash Flow Analysis . Duff & Phelps performed a discounted cash flow (“DCF”) analysis using the Management Projections for fiscal years 2016 through 2020 to derive indications of total enterprise value. A DCF analysis is designed to provide insight into the intrinsic value of a business based on its projected earnings and capital requirements, as well as the net present value of projected free cash flows.  Management’s projected EBITDA amounts were estimated on a cash basis and reflect cash payments related to severance, the proxy solicitation pursuant to this proxy statement and the Proposed Transaction-related expenses.  These expenses were provided by management of the Company.  Furthermore, Duff & Phelps deducted stock-based compensation as if it were cash compensation.
 
In its analysis shown in the table below, Duff & Phelps calculated the projected debt-free free cash flows of the Company   for the fiscal years 2016 through 2020. Due to the fact that taxable income in the projection period would be offset by net operating loss carryforwards, no taxes were deducted from EBITDA.  Duff & Phelps then calculated the projected debt-free cash flows of the Company   by subtracting capital expenditures, changes in deferred rent and changes in working capital. All of the assumptions and estimates used to determine the Company’s debt-free cash flows were provided by management of the Company.
 
Discounted Cash Flow Analysis      

($ in thousands)
   
LTM (1)
   
2016P
   
2017P
   
2018P
    
2019P
    
2020P
   
5-YR
CAGR
 
                                                     
Revenue
 
$
51,191
   
$
50,784
   
$
52,561
   
$
55,573
   
$
58,716
   
$
62,096
     
4.7
%
Growth
   
10.0
%
   
3.0
%
   
3.5
%
   
5.7
%
   
5.7
%
   
5.8
%
       
                                                         
EBITDA (2)
   
(2,054
)
   
(975
)
   
(831
)
   
315
     
1,633
     
2,917
   
NM
 
EBITDA Margin
   
(4.0
%)
   
(1.9
%)
   
(1.6
%)
   
0.6
%
   
2.8
%
   
4.7
%
       
                                                         
                                                         
           
8/16-12/16
                                         
EBITDA
   
(1,725
)
 
(831
)
 
$
315
   
$
1,633
   
$
2,917
         
Pro Forma Taxes (3)
     
0
     
0
     
0
     
0
     
0
         
Deferred Rent
     
(2
)
   
(7
)
   
(10
)
   
(6
)
   
0
         
Capital Expenditures
     
(125
)
   
(788
)
   
(834
)
   
(881
)
   
(931
)
       
(Increase) Descrease in Working Capitlal
     
(517
)
   
(124
)
   
(405
)
   
(464
)
   
(499
)
       
Free Cash Flow
   
(2,370
)
 
(1,750
)
 
(934
)
 
$
282
   
$
1,486
         
 
Enterprise Value
 
Low
   
Mid
   
High
 
                   
Terminal Revenue Exit Multiple (4)
   
1.4
x
 
1.5
x
1.6
x
Weighted Average Cost of Capital
   
16.50
%
   
16.00
%
 
15.50
%
Concluded Enterprise Value Range (Rounded)
 
$
41,000
   
$
45,500
   
$
49,500
 
 
Implied Enterprise Value Multiples
 
                                 
LTM Revenue (1)
 
$
51,191
     
0.80
x
   
0.89
x
   
0.97
x
2016 Revenue
   
50,784
     
0.81
x
   
0.90
x
   
0.97
x
2017 Revenue
   
52,561
     
0.78
x
   
0.87
x
   
0.94
x
 
(1)
Latest twelve months ended July 31, 2016; LTM revenue growth represents LTM period ended June 30, 2016.
(2)
EBITDA estimated to be on a cash basis and reflects cash payments relataed to severance, merger and proxy expenses.
  Furthermore, stock-based compensation was treated as if it were a cash expense.
(3)
Taxable income in 2019-2020 will be offset by the NOLs, both outstanding as of July 31, 2016 and created in 2016-2018.
(4)
Based on analysis of selected public companies and selected M&A transactions found on foollowing pages.
 
Duff & Phelps calculated a terminal value for the Company by capitalizing the projected revenue in fiscal 2020 by multiples ranging from 1.4x to 1.6x based on an analysis of selected public companies and selected merger and acquisition (M&A) transactions, as described below.
 
Duff & Phelps then discounted the sum of the projected debt-free cash flows   for fiscal year 2016 through 2020 and the terminal value for the Company by the Company’s estimated weighted-average cost of capital ranging from 15.5% to 16.5%. Fiscal 2016 debt-free cash flows   were adjusted to include only the interim period from August 1, 2016 through December 31, 2016.
 
The Company’s estimated weighted-average cost of capital was based on the Capital Asset Pricing Model using information derived from the companies in the selected public company analysis. The weighted average cost of capital reflected the relative risk associated with the Company’s projected debt-free cash flows, the Company’s current and pro-forma capital structures, as well as the rates of return that security holders could expect to realize on alternative investment opportunities.
 
The DCF analysis resulted in an estimated total enterprise value ranging from $41.0 million to $49.5 million. Subtracting (i) the estimated fair market value of the Company’s outstanding debt balance of $18.5 million (as valued by Duff & Phelps), (ii) an unfunded pension liability as of July 31, 2016 of $0.7 million and (iii) the estimated fair market value of outstanding stock options of the Company ranging from $0.8 million to $1.2 million, and adding the Company’s cash balance as of July 31, 2016 of $2.9 million, resulted in an estimated total common equity value range of $23.9 million to $31.9 million, or $0.90 to  $1.20 per share of Common Stock.
 
Market Approach .   Duff & Phelps analyzed valuation multiples of selected public companies and selected M&A transactions to apply to the Company projected 2020 revenue as part of the DCF analysis.
 
The companies utilized for comparative purposes in the following analyses are not identical to the Company, and the transactions utilized for comparative purposes in the following analyses are not identical to the Proposed Transaction.  Duff & Phelps did not have access to nonpublic information of any of the companies or transactions used for comparative purposes. Accordingly, complete valuation analyses of the Company and the Proposed Transaction cannot rely solely upon a quantitative review of the selected public companies and selected transactions, but involve complex considerations and judgments concerning differences in financial and operating characteristics of such companies and transactions and other factors that could af fect their value relative to that of the Company and the Proposed Transaction.  Therefore, the selected public companies and selected M&A transactions analyses are subject to these limitations.
 
Selected Public Companies Analysis.   A selected public companies analysis compares a subject company to a group of public companies that investors may consider similar to the Company, and applies valuation multiples to the Company’s financial performance metrics based on the qualitative and quantitative comparison. Comparative factors include, but are not limited to, historical and projected growth and volatility in earnings and factors that affect the riskiness of future cash flows.
 
Duff & Phelps compared certain financial information of the Company to corresponding data and ratios from publicly traded companies that Duff & Phelps deemed relevant to its analysis. For purposes of its analysis, Duff & Phelps used certain publicly available historical financial data and consensus equity analyst estimates for the selected publicly traded companies. Duff & Phelps included the following nine companies in the selected public companies analysis based on their relative similarity, primarily in terms of industry, size, growth and profit margins, to those of the Company:
 
Micro Cap (<$100M market cap)
Small Cap ($100M – $250M market cap)
   
Boule Diagnostics AB
EndoChoice Holdings, Inc.
   
Bovie Medical Corporation
STAAR Surgical Company
   
CU Medical Systems, Inc.
 
   
Ellex Medical Lasers Limited
 
   
ITL Ltd.
 
   
Misonix, Inc.
 
   
Streamline Health Solutions, Inc.
 
 
Duff & Phelps noted that the Company has not achieved profitability and does not expect to achieve positive EBITDA (as defined by Duff & Phelps deducting stock based compensation as if it were cash) until fiscal 2018.  Furthermore, the projected revenue growth rate for the Company  ranged from 3.0% to 5.8% in the projection period.  Companies that had the following characteristics were not considered and were excluded from the broader group: (i) latest twelve month revenue growth rate below 5% or above 15%; (ii) projected revenue growth rate below 0% or above 25%; (iii) latest twelve month EBITDA margin below (-50%) or above 10%; and (iv) enterprise values less than $10 million or greater than $250 million.  The tables below summarize certain observed trading multiples, on an aggregate basis, of the selected public companies.
 
In selecting multiples, Duff & Phelps reviewed the selected public companies, taken as a group. Duff & Phelps noted that the Company is significantly smaller in size relative to the selected public companies, with generally weaker profitability and weaker growth prospects, as illustrated in the table below.  Duff & Phelps selected enterprise value-to-revenue multiples to apply to the Company’s projected revenues in 2020. By 2020, the Company is projected to achieve EBITDA margin of 4.7%, which is above the median but below the mean of the selected public company projected margins for 2017, the latest year for which projections are publicly available.  Furthermore, the Company projected revenue growth is weaker than that of the selected public companies, taken as a group.
 
Selected Public Companies Analysis

 
COMPANY INFORMATION
 
REVENUE GROWTH
   
EBITDA MARGIN
 
Company Name
 
3-YR
CAGR
    LTM    
2016
   
2017
   
3-YR
CAGR
   
LTM
   
2016
   
2017
 
                                                   
Micro Cap (<$100M Market Cap)
                                                 
Boule Diagnostics AB (1)
   
6.4
%
   
14.4
%
 
NA
   
NA
     
7.3
%
   
7.6
%
 
NA
   
NA
 
Bovie Medical Corporation (1)
   
2.2
     
20.0
     
22.8
     
18.1
     
-17.0
     
-14.8
     
-7.2
     
-2.4
 
CU Medical Systems, Inc.
   
5.9
     
50.4
   
NA
   
NA
     
8.4
     
8.0
   
NA
   
NA
 
Ellex Medical Lasers Limited
   
19.3
     
5.6
     
-4.0
   
NA
     
7.7
     
11.2
     
10.3
   
NA
 
ITL Ltd.
   
7.7
     
9.7
   
NA
   
NA
     
8.0
     
3.8
   
NA
   
NA
 
Misonix, Inc.
   
12.3
     
11.6
   
NA
   
NA
     
-13.7
     
-10.6
   
NA
   
NA
 
Streamline Health Solutions, Inc.
   
6.0
     
7.3
     
2.3
     
10.2
     
-19.4
     
-2.8
   
NA
     
15.1
 
                                                                 
Small Cap ($100M - $250M)
                                                               
EndoChoice Holdings, Inc.
   
28.3
     
9.9
     
11.9
     
17.9
     
-52.7
     
-57.5
     
-47.9
     
-19.7
 
STAAR Surgical Company
   
6.5
     
10.7
     
8.5
     
7.6
     
-1.2
     
-14.6
   
NA
   
NA
 
                                                                 
Mean
   
10.5
%
   
15.5
%
   
8.3
%
   
13.4
%
   
-8.0
%
   
-7.8
%
   
-14.9
%
   
-2.3
%
Median
   
6.5
%
   
10.7
%
   
8.5
%
   
14.1
%
   
-1.2
%
   
-2.8
%
   
-7.2
%
   
-2.4
%
                                                                 
Cogentix (2)
   
9.4
%
   
10.0
%
   
3.0
%
   
3.5
%
   
-24.4
%
   
-4.0
%
   
-1.9
%
   
-1.6
%
 
(1)
Boule Diagnostics AB: LTM EBITDA margin based on estimated LTM EBITDA.
(2)
Projected revenue and adjusted EBITDA provided by Cogentix management
LTM = Latest Twelve Months
NA - Not Available
CAGR = Compounded Annual Growth Rate
EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization
* Excluded from Mean and Median
Source: S&P Capital IQ, SEC Filings, Annual and Interim Reports.
 
Duff & Phelps used publicly available historical financial data and equity research estimates as compiled by S&P Capital IQ, a web-based research and financial information database, to calculate certain valuation ratios for the public companies listed in the table below. Duff & Phelps analyzed historical and projected revenue and EBITDA for each of the publicly traded companies. Duff & Phelps then analyzed such public companies’ trading multiples of enterprise value to their respective reported and forecasted (as available) revenue. The table below summarizes such analysis:
 
Selected Public Companies Analysis

(US$ in millions, except per share data)
 
COMPANY INFORMATION
 
MARKET DATA
   
EV AS MULTIPLE OF
 
Company Name
 
Common
Stock Price
on
09/01/2016
   
% of 52-
Week High
   
Market
Capitalization
   
Enterprise
Value
   
LTM Revenue
   
2016 Revenue
   
2017 Revenue
 
 
                                         
Micro Cap (<$100M Market Cap)
                                         
Boule Diagnostics AB
 
$
15.13
     
94.5
%
 
$
71.2
   
$
71.4
     
1.68
x
 
NA
   
NA
 
Bovie Medical Corporation
   
3.89
     
80.4
     
105.8
     
106.5
     
3.21
     
2.94
     
2.49
 
CU Medical Systems, Inc.
   
3.31
     
64.4
     
47.7
     
57.6
     
1.68
   
NA
   
NA
 
Ellex Medical Lasers Limited
   
0.81
     
82.3
     
92.2
     
92.9
     
1.68
     
1.75
   
NA
 
ITL Ltd.
   
0.15
     
82.0
     
14.8
     
19.0
     
0.81
   
NA
   
NA
 
Misonix, Inc.
   
6.11
     
50.9
     
47.6
     
44.9
     
1.91
   
NA
   
NA
 
Streamline Health Solutions, Inc.
   
1.49
     
42.6
     
28.7
     
39.1
     
1.36
     
1.35
     
1.22
 
 
 
Median
           
$
47.7
   
$
57.6
     
1.68
x
   
1.75
x
   
1.86
x
 
 
Mean
           
$
58.3
   
$
61.6
     
1.76
x
   
2.01
x
   
1.86
x
Small Cap ($100M - $250M)
                                                       
EndoChoice Holdings, Inc.
   
3.89
     
19.8
     
101.3
     
87.5
     
1.17
     
1.08
     
0.92
 
STAAR Surgical Company
   
8.71
     
90.7
     
352.2
     
363.2
     
4.55
     
4.34
     
4.03
 
 
 
Median
           
$
226.7
   
$
225.3
     
2.86
x
   
2.71
x
   
2.48
x
 
                                                       
 
                                                       
Cogentix (1)
 
$
1.16
     
68.2
%
 
$
31.9
   
$
48.5
     
0.95
x
   
0.96
x
   
0.92
x
                                                         
 
(1)
Based on stock price as of September 1, 2016, value of Notes used in calculating EV was estimated by D&P, and projected revenue multiples were based on revenue estimates provided by Cogentix management.

LTM = Latest Twelve Months
EV - Enterprise Value = (Market Capitalization + Management Equity + Debt + Preferred Stock + Non-Controlling Interest) - (Cash & Equivalents + Net Non-Operating Assets)
* Excluded from Mean and Median
Source: S&P Capital IQ, SEC Filings, Annual and Interim Reports.
 
Based on the risk analysis described above, Duff & Phelps selected multiples of enterprise value to revenue to apply to the Company’s projected 2020 revenue that were below the mean and median multiples of revenue, but above the bottom of the  range of the selected public companies due to the Company’s smaller size, weaker profitability and lower projected growth rates.  The range of multiples selected to apply to the Company’s projected 2020 revenue in the DCF analysis was 1.4x to 1.6x.
 
Furthermore, Duff & Phelps compared the valuation multiples from the selected public company analysis and the selected M&A transactions analysis to the range of implied enterprise value multiples for the Company based on the DCF analysis.  Based on the Company risk and growth profile relative to the selected publicly traded companies, the implied enterprise value to revenue multiples for the Company  were determined to be reasonable.
 
Selected Transactions Analysis .  Duff & Phelps also identified certain precedent M&A transactions involving target companies that had businesses somewhat similar to that of the Company.  Duff & Phelps compared the Company to the target companies involved in the selected M&A transactions listed in the table below. The selection of these M&A transactions was based, among other things, on the target company’s industry, the relative size of the M&A transaction compared to the Proposed Transaction and the availability of public information related to the M&A transactions.
 
Selected Transaction Analysis

($ in millions)
Date
 
Target Name
 
Target Business Description
 
Acquirer Name
 
 Implied EV
($MM)
 
 LTM
Revenue
($MM)
 
LTM
EBITDA
($MM)
 
 EBITDA
Margin
 
 EV /
Revenue
 
 EV /
EBITDA
 
                                       
10/13/2015
 
Thermomedics, Inc.
 
Non-contact infrared thermometers
 
PositiveID Corporation
 
$3
 
$1
 
$0
 
24.3%
 
3.48x
 
14.3x
 
3/11/2014
 
Aubrey Group, Inc.
 
Bio-artificial liver, blood pumps, cardiac catheters
 
Sparton Corp.
 
5
 
8
 
N/A
 
N/A
 
0.60x
 
N/A
 
1/30/2015
 
Charter Medical, Ltd.
 
Specialty single-use products for blood transfusion
 
Solesis Medical Technologies
 
30
 
20
 
3
 
16.8%
 
1.53x
 
9.1x
 
3/24/2016
 
Magellan Diagnostics, Inc.
 
Point-of-care systems focused on lead testing
 
Meridian Bioscience, Inc.
 
66
 
16
 
N/A
 
N/A
 
4.13x
 
N/A
 
3/17/2016
 
DFINE Inc.
 
Pathologies of the vertebrae and treatment of fractures
 
Merit Medical Systems, Inc.
 
98
 
33
 
N/A
 
N/A
 
2.92x
 
N/A
 
7/27/2016
 
CAS Medical Systems, Neonatal Business
 
Neonatal intensive care disposables products
 
Trinity Medical Devices Inc.
 
4
 
2
 
N/A
 
N/A
 
1.74x
 
N/A
 
11/5/2013
 
Medi-Lynx Cardiac Monitoring, LLC
 
Arrhythmia ECG waveform and classifies morphology
 
Medicalgorithmics S.A.
 
45
 
33
 
13
 
38.2%
 
1.39x
 
3.6x
 
3/11/2014
 
Separation Technology Inc.
 
Provides centrifugation solutions
 
EKF Diagnostics Holdings plc
 
4
 
4
 
1
 
12.5%
 
1.00x
 
8.0x
 
3/28/2016
 
Datascope Corp., Pressure-Assisted Hemostatic Devices
 
Assist hemostasis of the radial artery puncture site
 
Merit Medical Systems, Inc.
 
28
 
40
 
N/A
 
N/A
 
0.69x
 
N/A
 
7/6/2016
 
Celleration Inc.
 
Ultrasound solution treating a wound bed
 
Alliqua BioMedical, Inc.
 
50
 
9
 
N/A
 
N/A
 
5.69x
 
N/A
 
2/3/2016
 
CryoLife, Inc., HeRO Graft Product Line
 
Comprises subcutaneous vascular access system
 
Merit Medical Systems, Inc.
 
19
 
8
 
N/A
 
N/A
 
2.47x
 
N/A
 
4/14/2016
 
X-spine Systems, Inc.
 
Develops spinal implants and instrumentation
 
Bacterin International Holdings
 
87
 
42
 
7
 
17.3%
 
2.05x
 
11.8x
 
1/5/2015
 
Genesee BioMedical, Inc.
 
Tissue substitute used in atrial and ventricular repairs
 
CryoLife Inc.
 
2
 
1
 
N/A
 
N/A
 
1.64x
 
N/A
 
10/4/2013
 
Mick Radio-Nuclear Instruments, Inc.
 
Prostate brachytherapy LDR, HDR, and LDR/HDR
 
Eckert & Ziegler BEBIG Inc.
 
2
 
4
 
N/A
 
N/A
 
0.59x
 
N/A
 
 
   
High
 
$98
 
$42
 
$13
 
38.2%
 
5.69x
 
14.3x
 
   
Low
 
$2
 
$1
 
$0
 
12.5%
 
0.59x
 
3.6x
 
                               
   
Mean
 
$31
 
$16
 
$5
 
21.8%
 
2.14x
 
9.4x
 
Source: Capital IQ
 
Median
 
$23
 
$8
 
$3
 
17.3%
 
1.69x
 
9.1x
 
 
Historical Stock Trading and Premium Analysis .  B ecause the Common Stock is publicly traded, Duff & Phelps considered the per share value ascribed to it by the public markets.  Duff & Phelps analyzed the Company’s historical stock prices, trading volume, level of institutional ownership and historical valuation multiples.  On September 1, 2016, the closing price of Common Stock as reported on The NASDAQ Capital Market was $1.16 per share.  Over the 30-day trading period from July 21, 2016 to September 1, 2016, the Common Stock traded in a range of $1.01 to  $1.25 per share, with a 30-day average share price of $1.11.  In performing its fundamental valuation, Duff & Phelps considered the reported price per share and the 30-day trading average of the Common Stock as indications of value.
 
Valuation Analysis Conclusions
 
Duff & Phelps’ valuation analysis, as summarized in the table below, resulted in indications of the Company’s total enterprise value ranging from $41.0 million to $49.5 million.  After s ubtracting (i) the estimated fair market value of the Company’s outstanding debt balance of $18.5 million (as valued by Duff & Phelps), (ii) an unfunded pension liability as of July 31, 2016 of $0.7 million and (iii) the estimated fair market value of outstanding stock options of the Company ranging from $0.8 million to $1.2 million, and adding the Company’s cash balance as of July 31, 2016 of $2.9 million, resulted in an estimated total common equity value range of $23.9 million to $31.9 million, or $0.90 to $1.20 per share of Common Stock.  These indications of value per share for the Common Stock were below the per share value implied by the Proposed Transaction of $1.25 per share.
 
In addition, as summarized in the table below, Duff & Phelps determined the indicated value per share of Common Stock factoring in the Accelmed investment of $25.0 million, the note exchange by Mr. Pell and the approximately $1.3 million in expected transaction costs.  The common equity values range from $65.8 million to $74.1 million and the increase in fully diluted shares to 60.3 million shares.  This results in a range of values from $1.09 to $1.23 per share.

Duff & Phelps observed that its analysis supported its determination of the fairness, from a financial point of view, of the Proposed Transaction, as a whole, to the unaffiliated public stockholders of the Company.
 
Valuation Conclusion

(in thousands, except per share values and multiples)
   
D&P Estimate - Pre-Transaction
   
Current
 
Current
 
D&P Estimate - Post Transaction
   
Proposed
 
   
Low
   
Mid
   
High
   
Market Value (1)
 
Market Value (2)
 
Low
   
Mid
   
High
   
Transaction
 
                                                       
Enterprise Value Conclusion
 
$
41,000
   
$
45,500
   
$
49,500
   
$
47,000
   
$
48,500
   
$
41,000
   
$
45,500
   
$
49,500
       
                                                                       
Cash and Equivalents (3)
   
2,924
     
2,924
     
2,924
     
2,924
     
2,924
     
2,924
     
2,924
     
2,924
       
Accelmed Investment
                                           
25,000
     
25,000
     
25,000
     
25,000
 
Transaction Costs (4)
   
0
     
0
     
0
     
0
     
0
     
(1,300
)
   
(1,300
)
   
(1,300
)
   
(1,300
)
Unfunded Pension Liability (5)
   
(746
)
   
(746
)
   
(746
)
   
(746
)
   
(746
)
   
(746
)
   
(746
)
   
(746
)
       
FMV of Promissory Notes to be Exchanged (rounded) (6)
   
(18,528
)
   
(18,528
)
   
(18,528
)
   
(18,528
)
   
(18,528
)
   
0
     
0
     
0
     
18,528
 
                                                                         
Aggregate Equity Value
   
24,650
     
29,150
     
33,150
     
30,576
     
31,939
     
66,878
     
71,378
     
75,378
     
42,228
 
                                                                         
Est. Value of Stock Options (7)
   
(784
)
   
(1,004
)
   
(1,211
)
   
(1,077
)
   
(1,147
)
   
(1,048
)
   
(1,153
)
   
(1,249
)
       
Common Equity Value
   
23,866
     
28,146
     
31,939
     
29,499
     
30,791
     
65,830
     
70,225
     
74,129
     
42,228
 
                                                                         
Shares Outstanding as of September 1, 2016
   
26,137
     
26,137
     
26,137
     
26,137
     
26,137
     
26,137
     
26,137
     
26,137
         
Accelmed New Shares
                                           
16,129
     
16,129
     
16,129
     
16,129
 
Pell New Shares
                                           
17,659
     
17,659
     
17,659
     
17,659
 
Unvested Restricted Shares as of September 1, 2016
   
408
     
408
     
408
     
408
     
408
     
408
     
408
     
408
         
Fully Diluted Shares Outstanding
   
26,544
     
26,544
     
26,544
     
26,544
     
26,544
     
60,332
     
60,332
     
60,332
     
33,788
 
                                                                         
Indicated Value Per Share
 
$
0.90
   
$
1.06
   
$
1.20
   
$
1.11
   
$
1.16
   
$
1.09
   
$
1.16
   
$
1.23
   
$
1.25
 
 
Implied Enterprise Value Multiples
 
LTM Revenue (8)
   
$51,191
     
0.80
x
   
0.89
x
   
0.97
x
   
0.92
x
   
0.95
x
   
0.80
x
   
0.89
x
   
0.97
x
2016 Revenue
   
50,784
     
0.81
x
   
0.90
x
   
0.97
x
   
0.93
x
   
0.96
x
   
0.81
x
   
0.90
x
   
0.97
x
2017 Revenue
   
52,561
     
0.78
x
   
0.87
x
   
0.94
x
   
0.89
x
   
0.92
x
   
0.78
x
   
0.87
x
   
0.94
x
 
(1)
Represents 30 trading day average closing prices from July 21, 2016 through September 1, 2016.
(2)
Closing price as of September 1, 2016.
(3)
As of July 31, 2016.
(4)
Based on management estimates.
(5)
Represents the unfunded portion of savings and retirement plans as of July 31, 2016.
(6)
Represents the estimated FMV of the Note Exchange (face value of $29.5 million including accrued interest) contemplated in the Proposed Transaction.
(7)
Based on option pricing model; 2,762,445 stock options with exercise prices ranging between $0.88 and $24.40.
(8)
Latest twelve months ended July 31, 2016.
 
FMV = Fair Market Value
 
Other Information .

Disclosure of Prior Relationships . Duff & Phelps has acted as financial advisor to the Special Committee and will receive fees for its services.  No portion of Duff & Phelps’ fees was contingent upon either the conclusion expressed in its opinion or whether or not the Proposed Transaction is successfully consummated.  Pursuant to the terms of the engagement, a portion of Duff & Phelps’ fees was paid upon Duff & Phelps’ informing the Special Committee that it was prepared to deliver its opinion.  Other than this engagement, during the two years preceding the date of its opinion, Duff & Phelps had no material relationship with any party to the Proposed Transaction for which compensation was received or was intended to be received, nor is any such material relationship or related compensation mutually understood to be contemplated.

Fees and Expenses .  Pursuant to its engagement letter with the Company, Duff & Phelps received a professional fee for providing financial advisory services in the amount of $100,000 and a fee for providing a fairness opinion in the amount of $225,000. The Company has also agreed to reimburse Duff & Phelps for its reasonable out-of-pocket expenses incurred in connection with its engagement and to indemnify Duff & Phelps, its affiliates and each of their respective directors, officers, attorneys and other agents, stockholders, employees and controlling persons against certain liabilities, including liabilities under the federal securities laws, relating to or arising out of Duff & Phelps’ engagement.
 
The issuance of Duff & Phelps’ opinion was approved by the Transaction Opinions Review Committee of Duff & Phelps.
 
Description of the Purchase Agreement and Related Agreements

The following is a summary of the material terms of the Purchase Agreement, the Voting Agreement, the Note Exchange Agreement and the Registration Rights Agreement. While we believe this summary covers the material terms of these agreements, we encourage you to read each of them in its entirety; they are included as Exhibits 10.1, 99.2 and 10.2, respectively, to the Current Report on Form 8-K filed with the SEC by the Company on September 7, 2016, and Exhibit 19 to the Schedule 13D/A filed with the SEC by Mr. Pell on September 8, 2016.
 
Purchase Agreement

Under the Purchase Agreement, the Company has agreed to issue to the Investor, and the Investor has agreed to purchase from the Company, 16,129,033 shares of our Common Stock at $1.55 per share, for an aggregate purchase price of $25 million (rounded up to the nearest whole share).  The sale of shares of our Common Stock pursuant to the Purchase Agreement is expected to close in the fourth quarter of 2016, subject to the approval of the Company’s stockholders (in accordance with applicable NASDAQ requirements) and the satisfaction of the other closing conditions.   The Company has agreed to use commercially reasonable efforts to seek the approval by its stockholders by November 18, 2016 of the Purchase Agreement and the Note Exchange Agreement (as defined below) at a meeting of the Company’s stockholders, subject to certain conditions.

Closing Conditions

Under the Purchase Agreement, the Investor’s obligation to consummate the transaction is conditioned on, among other things, (i) the Company obtaining the requisite stockholder approval, (ii) the Company having timely submitted a plan to regain compliance with the NASDAQ listing requirements, (iii) the Company possessing all certificates, marks and other registrations necessary to sell any and all products of the Company in which the Company’s products are being sold as of the date of the Purchase Agreement (where the absence of which would reasonably likely to have a material adverse effect); (iv) Mr. Pell having entered into the Voting Agreement; (v) all of the promissory notes issued to Mr. Pell by the Company having been exchanged for shares of Common Stock and the cancellation of all the warrants issued to Mr. Pell in connection with the Note Exchange Agreement; and (vi) the Company, Mr. Pell and the Investor having entered into a Registration Rights Agreement.

Covenants

Amendments to Certificate of Incorporation and Bylaws

The Company agreed to amend the Amended and Restated Bylaws of the Company (the “Bylaws”) to reduce the required quorum for all meetings of the Company’s stockholders to one-third of all of the issued and outstanding shares of stock entitled to vote at the meeting.  This amendment was effected on September 12, 2016.

Also under the Purchase Agreement, the Company has agreed that, following the closing of the Proposed Transaction and upon demand by Accelmed, the Company shall take all corporate actions necessary (including taking commercially reasonable efforts to obtain stockholder approval)  to amend and restate (i) the Bylaws to read substantially as set forth on Exhibit B to this proxy statement, and (ii)  the Amended and Restated Certificate of Incorporation of the Company (the “Certificate of Incorporation”) to read substantially as set forth on Exhibit C to this proxy statement, in each case, with such additional changes as the Company’s Board of Directors, including the directors designated by Accelmed, may approve.  The Company is not seeking stockholder approval of the amendments to the Amended and Restated Certificate of Incorporation or the Bylaws of the Company at the Special Meeting.
 
Stockholder Meeting
 
The Company has agreed  to, as reasonably promptly as practicable after the SEC confirms it has no further comments on this proxy statement, duly call, establish a record date for, give notice of, convene and hold the Stockholder Meeting, and to use commercially reasonable efforts to seek the approval of the Company’s stockholders for the Proposed Transaction by November 18, 2016.  This obligation continues to apply notwithstanding a Change of Recommendation (as defined below) by the Board.
 
The Company is permitted to postpone or adjourn the Stockholder Meeting only (i) with the consent of the Investor, (ii) for the absence of a quorum, (iii) to allow reasonable additional time for any supplemental or amended disclosure which the Company has determined in good faith is necessary under applicable law and for such supplemental or amended disclosure to be disseminated and reviewed by the Company’s stockholders prior to the Stockholder Meeting or following an order or request from the SEC, or (iv) to allow additional solicitation of votes in order to obtain the approval of the Company’s stockholders for the Proposed Transaction.
 
The Company is not permitted under the Purchase Agreement to change the record date of the Stockholder Meeting or establish a different record date without the prior written consent of Investor (not be unreasonably withheld, conditioned or delayed), unless required to do so by applicable law. If the date of the Stockholder Meeting as originally called is for any reason adjourned, postponed or otherwise delayed, the Company has agreed that, unless the Investor otherwise approves in writing, the Company will use commercially reasonable efforts to implement such adjournment, postponement or other delay in such a way that the Company does not establish a new record date for the Stockholder Meeting, as so adjourned, postponed or delayed, except as required by applicable law
 
Non-Solicitation Covenant
 
The Company has agreed to cease any ongoing solicitation, encouragement, discussions or negotiations with any parties (other than the Investor)  with respect to any unsolicited bona fide written proposal made by a person to acquire beneficial ownership of 50% or more of the assets of, or 50% or more of the Common Stock of, the Company pursuant to a merger, consolidation or other business combination, sale of shares of stock, sale of assets, tender or exchange offer or similar transaction involving the Company (an “Acquisition Proposal”).
 
The Company has also agreed that it shall not, directly or indirectly, solicit, initiate or knowingly facilitate or knowingly encourage (including by way of furnishing information), or knowingly take any other action designed or reasonably likely to facilitate or encourage, any inquiry with respect to, or the making, submission or announcement of, any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal.
 
Subject to certain exceptions, the Company has further agreed that it shall not, directly or indirectly (i) participate in any discussion or negotiations regarding an Acquisition Proposal with, or furnish any non-public information or access to its properties, books, records or personnel to, any person that has made or, to its knowledge, is considering making an Acquisition Proposal, (ii) make a Change of Recommendation, (iii) enter into any agreement providing for any Acquisition Proposal (subject to certain exceptions) or (iv) resolve, propose or agree to any of the foregoing.
 
The Company has agreed to promptly, and in any event within 48 hours,  notify the Investor in writing if the Company receives  any Acquisition Proposal or any offer, inquiry or request for discussions or negotiations regarding any Acquisition Proposal.
 
Superior Proposals
 
If the Company receives an unsolicited Acquisition Proposal that the Board determines in good faith, after consultation with its outside legal counsel and financial advisor, could reasonably be expected to result in a Superior Proposal and, after consultation with its outside legal counsel, the Board determines that such action is required in order for the directors to comply with their fiduciary duties under applicable law, then the Company is permitted to take the following actions: (i) subject to receiving an executed confidentiality agreement from the third party, furnish non-public information to the third party making such Acquisition Proposal and (ii) engage in discussions or negotiations with such third party with respect to such Acquisition Proposal.  A “Superior Proposal” is an Acquisition Proposal which the Board, acting in its good faith judgment (after consultation with its outside legal counsel and financial advisor), determines is superior from a financial point of view to the transactions contemplated by the Purchase Agreement taking into account such factors and matters deemed relevant in good faith by the Board, including the (a) identity of the Person making the Acquisition Proposal; (b) likelihood of consummation in accordance with the terms of such Acquisition Proposal; and (c) legal, financial (including the financing terms), regulatory, timing and other aspects of such Acquisition Proposal.
 
Change of Recommendation
 
Except as provided below, under the terms of the Purchase Agreement, the Board has agreed not to: (i) change, qualify, withdraw or modify, or propose publicly to change, qualify, withdraw or modify, in a manner adverse to the Investor, the Board Recommendation (as defined in the Purchase Agreement), (ii) approve, adopt or recommend, or propose publicly to approve, adopt or recommend, any Acquisition Proposal or (iii) enter into any letter of intent, merger, acquisition or similar agreement with respect to any Acquisition Proposal other than any confidentiality agreement to be entered into by the Company (each of the foregoing, a “Change of Recommendation”).
 
Notwithstanding the foregoing, prior to the Stockholder Meeting, the Board may make a Change of Recommendation in connection with a Superior Proposal if:  (a) the Board has determined in good faith, after consultation with its outside legal counsel, that such action is required in order for the directors to comply with their fiduciary duties under applicable law; (b) the Company has provided the Investor with at  least four business days’ prior written notice that the Board intends to take such action; (c) prior to taking such action,  if requested by the Investor, the Company has  negotiated in good faith with the Investor during such four business day period to make such revisions to the terms of the Purchase Agreement so that effecting such Change of Recommendation would no longer be required in order for the directors to comply with their fiduciary duties under applicable law; and (d) the Board shall have considered in good faith any changes to the Purchase Agreement offered in writing by the Investor in a manner that would form a binding contract if accepted by the Company and shall have determined in good faith, after consultation with its outside legal counsel and financial advisor, that the Superior Proposal would continue to constitute a Superior Proposal if such changes offered in writing by the Investor were to be given effect.
 
In addition, nothing in the Purchase Agreement prohibits or restricts the Board from making a Change of Recommendation to the extent that it determines in good faith, after consultation with its outside legal counsel, that effecting a Change of Recommendation would be required in order for the directors to comply with their fiduciary duties under applicable law.
 
Notwithstanding a Change of Recommendation, the Company is obligated to duly call, establish a record date for, give notice of, convene and hold the Stockholder Meeting and use commercially reasonable efforts to seek stockholder approval of the Proposed Transaction by November 18, 2016.
 
Representations and Warranties

In the Purchase Agreement, each of the Company and the Investor has made certain customary representations and warranties. The Company’s representations and warranties to the Investor including, among others, representations and warranties with respect to its capitalization and certain other representations regarding matters relating to the Company’s business and the issuance of the Company’s securities. The Investor’s representations and warranties to the Company including, among others, representations and warranties about its status as an accredited investor and its investment intent. The representations and warranties in the Purchase Agreement survive until the second anniversary of the closing of the Purchase Agreement.

Indemnification

Under the Purchase Agreement and subject to certain limitations set forth therein, the Company has agreed to indemnify, defend and hold harmless Accelmed, its affiliates and certain other persons from and against certain liabilities incurred as a result of, or arising out of, or relating to, any claim (whether direct or derivative) of a breach of fiduciary duty by the Board, or by any director or by any stockholder, in connection with the Purchase Agreement and the transactions contemplated thereby.

Termination

Each of the Company and the Investor may terminate the Purchase Agreement in certain circumstances, including, among other things, if the closing of the Proposed Transaction has not occurred by December 22, 2016 (the “Outside Date”), by mutual written consent, and in connection with the other party’s breach in a material respect of its representations, warranties, covenants or agreements contained in the Purchase Agreement that is either not curable or, if curable, has not been cured prior to the Outside Date.

In addition to the termination rights described above, if the Company’s stockholders have not approved the Proposed Transaction by the Outside Date, then the Investor will also have the right to terminate the Purchase Agreement. If the Board of Directors has not theretofore made a Change of Recommendation, then the Company will be required to pay a termination fee of $500,000 to the Investor.  If the Company is required to pay this $500,000 termination fee, then the Company will not be required to reimburse the fees and expenses of the Investor that would otherwise be required to be reimbursed (up to a $400,000 cap) if the Purchase Agreement is terminated under certain other circumstances or if the closing of the Proposed Transaction occurs.

The Investor also has the right to terminate the Purchase Agreement prior to the Special Meeting if the Board of Directors has made a Change of Recommendation.  Such termination right may only be exercised until the later of five business days following the date such Change of Recommendation has been made by the Board or 15 calendar days prior to the date of the Stockholder Meeting.  If the Investor exercises this termination right, then the Company will be required to pay a termination fee of $1 million to the Investor. If the Company is required to pay this $1 million termination fee, then the Company will not be required to reimburse the fees and expenses of the Investor that would otherwise be required to be reimbursed (up to a $400,000 cap) if the Purchase Agreement is terminated under certain other circumstances or if the closing of the Proposed Transaction occurs.

Note Exchange Agreement

In connection with entering into the Purchase Agreement, the Company entered into the Note Exchange Agreement.  Under the Note Exchange Agreement, the entire outstanding principal amount of and all accrued interest on the promissory notes made by the Company and purchased by Mr. Pell will be exchanged for 17,688,423 shares of Common Stock (assuming the closing of the Note Exchange Agreement occurs on November 3, 2016), at a price per share of $1.67, and all the warrants the Company had issued to Mr. Pell will be cancelled and of no further force and effect, immediately prior to the closing of the Purchase Agreement. As of the date hereof, Mr. Pell holds promissory notes with approximately $28,500,000 of outstanding principal and $1 million of accrued interest, for a total of approximately $29,500,000, and owns warrants with the right to purchase an aggregate of 376,123 shares of Common Stock at a weighted average exercise price of $9.31 per share. Subject to the approval of the Note Exchange Agreement by the Company’s stockholders, the exchange will occur immediately prior to the closing of the Purchase Agreement.
 
Certain Accounting and Tax Implications

As discussed below, Mr. Pell and the Investor entered into the Voting Agreement, pursuant to which, among other things, the parties thereto have agreed to vote any shares of Common Stock controlled or owned by them as directed by the terms of the Voting Agreement. Mr. Pell and the Investor collectively will own over 50% of the Common Stock after the consummation of the Proposed Transaction, which will result in a change of control of the Company for purposes of Accounting Standards Codification 805. The Company will elect not to apply push down accounting for the Proposed Transaction as allowed under current accounting guidance because neither Mr. Pell nor the Investor prepare stand-alone financial statements nor do Mr. Pell and the Investor collectively prepare stand-alone financial statements.

The Debt Exchange will create “cancellation of debt” income for U.S. income tax purposes.  The cancellation of debt income is expected to be approximately $2.1 million and is calculated based on the difference of the exchange price of the indebtedness pursuant to the Note Exchange Agreement ($1.67 per share of Common Stock) compared to fair value of the shares of Common Stock of $1.55 (based on the price per share under the Purchase Agreement). The Company expects the cancellation of debt income to have minimal impact on its taxes payable for 2016 due to the Company’s taxable losses for the current year and its ability to use its net operating losses.

The Company records interest expense on the indebtedness held by Mr. Pell based on the stated interest rate on the indebtedness of approximately 1% plus amortization of the associated debt discount, which results in an effective interest rate of approximately 6%.  After the Debt Exchange, the Company will no longer accrue interest expense associated with the indebtedness held by Mr. Pell.  For the six months ended June 30, 2016, the total interest expense associated with the indebtedness held by Mr. Pell was $0.7 million.

The Company will recognize non-cash expense upon the exchange of the indebtedness held by Mr. Pell, based on the difference between the original exchange price of each note and the exchange price per the Note Exchange Agreement.  The Company expects such non-cash expense to be approximately $18.6 million.

The proposed transactions pursuant to the Note Exchange Agreement will create limitations on the Company’s ability to use its net operating losses to offset future taxable income.  The Company is currently assessing the amounts of these limitations under Section 382 of the Internal Revenue Code.  The Company expects no impact to the Company’s balance sheet as a result of these limitations as the net operating losses are fully reserved in the Company’s balance.

The Company expects to raise $25 million in cash in the Proposed Transaction.  The increase to additional paid in capital due to the equity issuance will be offset by the  incremental costs associated with the equity issuances, which the Company currently expects will be approximately $1.3 million.

Voting Agreement

In connection with the entry into the Purchase Agreement, Mr. Pell and the Investor entered into the Voting Agreement, pursuant to which, among other things, the parties thereto have agreed to vote any shares of Common Stock controlled or owned by them as directed by the terms of the Voting Agreement.
 
Each of Mr. Pell and the Investor has agreed to vote their shares of Common Stock for the other party’s nominees to the Board and each of Mr. Pell and the Investor are entitled to nominate two directors. Following the transactions contemplated by the Purchase Agreement, Mr. Pell and the Investor will own or control a majority of the outstanding Common Stock of the Company. The Voting Agreement is intended, in part, to qualify the Company as a “Controlled Company” under NASDAQ Rule 5615(c)(2), and the parties to the Voting Agreement have agreed to take such further actions (consistent with the terms thereof and of the Purchase Agreement) as may be reasonably necessary to satisfy such qualification. Additionally, under the terms of the Purchase Agreement, the Company has agreed that one of the directors nominated to the Board by the Investor will serve as Chairman of the Board until the Investor or its affiliates no longer own 50% of the shares purchased pursuant to the Purchase Agreement or unless otherwise agreed to by the  Investor.  The Voting Agreement also requires the stockholders party thereto to take all necessary actions, to the fullest extent permitted by applicable law (including voting their shares of Common Stock), to cause the election of the nominees designated by Mr. Pell and the Investor.

Also pursuant to the Voting Agreement, each of Mr. Pell and the Investor has agreed to assist in good faith to cause the approval and implementation of the amendments to the Company’s Amended and Restated Certificate of Incorporation and Amended and Restated By-laws contemplated under the Purchase Agreement to be effected following by the closing of the Proposed Transaction, and, unless otherwise approved by the other party, not to vote any shares of Common Stock controlled or owned by them for the approval of any business combination (as defined in Section 203 of the Delaware General Corporation Law) until such amendments are validly approved and effected.  The foregoing obligations shall terminate and be of no further force of effect if after two meetings of the Company’s stockholders at which approval of such amendments has been presented, the stockholders of the Company shall not have provided the necessary vote in favor of such amendments.

This Voting Agreement will become effective upon the closing of the Proposed Transaction and shall continue in effect until such time as Accelmed no longer owns any of the shares of Common Stock that Accelmed is to acquire pursuant to the Purchase Agreement (the “Purchased Shares”).  However, Mr. Pell may terminate the Voting Agreement at any time Accelmed and its affiliates own in the aggregate less than 50% of the Purchased Shares, and Accelmed may terminate the Voting Agreement at any time Mr. Pell and his affiliates own in the aggregate less than 50% of the shares of Common Stock issued to Mr. Pell pursuant to the Note Exchange Agreement.

Director Nominees

Pursuant to the Voting Agreement, each of Mr. Pell and the Investor are entitled to nominate two directors to the Board.  The initial nominees of Mr. Pell are Mr. Pell and Mr. Zauberman and the initial nominees of the Investor are Dr. Uri Geiger and Mr. Nachum Shamir.

Registration Rights Agreement

In connection with the closing of the Purchase Agreement, the Company will enter into a registration rights agreement with Mr. Pell and the Investor (collectively, the “Holders”) (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, the Company has agreed to register the sale of shares of Common Stock under certain circumstances. Pursuant to the terms of the Registration Rights Agreement, the Company has agreed to maintain the effectiveness of the registration statement until the earlier of (i) three years after the registration statement is declared effective by the SEC, (ii) the date upon which the securities held by the Holders cease to be Registrable Securities (as that term is defined in the Registration Rights Agreement), or (iii) the date upon which the Holders have completed the distribution described in the registration statement.
 
Demand Rights

In general, any demand for an underwritten offering (other than concurrently with a demand registration) shall constitute a demand request subject to the limitations set forth in this paragraph. Generally, the Company is required to provide notice of the underwritten offering at least five business days before the commencement of the offering to all other holders of registrable securities, who may, in certain circumstances, participate in the underwritten offering. Subject to certain exceptions, the Company will not be obligated to effect more than one demand registration for all the Holders as a group (subject to certain exceptions).

Piggyback Rights

Subject to certain exceptions, if at any time the Company proposes to register an offering of Common Stock or conduct an underwritten offering, whether or not for our own account, then the Company must provide prompt notice to each Holder of such proposal, to allow them to include a specified number of their shares in that registration statement or underwritten offering, as applicable.

Conditions and Limitations; Expenses

These registration rights are subject to certain conditions and limitations, including the right of the underwriters to limit the number of shares to be included in a registration and our right to delay or withdraw a registration statement under certain circumstances. Subject to certain exceptions, the Company will generally pay all registration expenses in connection with our obligations under the registration rights agreement.

NASDAQ Rule 5635(b)

NASDAQ Rule 5635(b) requires stockholder approval prior to any issuance of securities when the issuance will result in a change of control of the company, which NASDAQ deems to occur when, as a result of the issuance, an investor owns, or has the right to acquire, 20% or more of the outstanding shares of Common Stock or voting power and such ownership would be the single largest ownership position in the company. In exchange for the Investor’s $25 million investment in the Company, the Investor will be issued 16,129,033 shares of Common Stock at the closing of the Purchase Agreement, representing approximately 60.8% of our Common Stock outstanding prior to the issuance, and in connection with the consummation of the transactions contemplated by the Note Exchange Agreement, Mr. Pell will be issued 17,688,423 shares of Common Stock (assuming the closing of the Note Exchange Agreement occurs on November 3, 2016), representing approximately 66.6% of our Common Stock outstanding prior to the issuance (assuming, in each case, that 26,544,299 shares of Common Stock are issued and outstanding, which is the number of shares issued and outstanding as of the record date). After giving effect to the Proposed Transaction, the shares issued to the Investor pursuant to the Purchase Agreement will represent 26.7% of the Company’s issued and outstanding shares of Common Stock, and the shares issued to Mr. Pell pursuant to the Note Exchange Agreement will represent 29.3% of the Company’s issued and outstanding shares of Common Stock (assuming, in each case, that the closing of the Proposed Transaction occurs on November 3, 2016 and based in part on the number of shares of Common Stock outstanding as of the record date). Immediately following the consummation of the transactions contemplated by the Purchase Agreement, Mr. Pell and the Investor will own or control a majority of our outstanding Common Stock.  Pursuant to the Voting Agreement, each of Mr. Pell and the Investor has agreed to vote their shares of Common Stock for the other party’s nominees to the Board and for certain other matters described therein. The Voting Agreement is intended, in part, to qualify the Company as a “Controlled Company” under NASDAQ Rule 5615(c)(2), and the parties to the Voting Agreement have agreed to take such further actions (consistent with the terms thereof and of the Purchase Agreement) as may be reasonably necessary to satisfy such qualification.
 
Stockholder Approval

Pursuant to the Purchase Agreement, the Company has agreed to use commercially reasonable efforts to seek stockholder approval of the contemplated issuance of the securities thereunder no later than November 18, 2016. If the Company obtains stockholder approval at the Special Meeting, this provision will have been satisfied.

If the Company’s stockholders do not approve the Proposed Transaction, then the issuance of shares of Common Stock to the Investor pursuant to the Purchase Agreement and the exchange of Mr. Pell’s outstanding promissory notes for shares of Common Stock pursuant to the Note Exchange Agreement will not become effective. Pursuant to the Purchase Agreement, the Company will also be required to pay a termination fee of $500,000 to the Investor if the Company’s stockholders do not approve the Proposed Transaction by December 22, 2016.  If the Company is required to pay this $500,000 termination fee, then the Company will not be required to reimburse the Investor’s fees and expenses that would otherwise be required to be reimbursed if the Purchase Agreement is terminated under certain other circumstances or if the Proposed Transaction is consummated (up to a $400,000 cap).
 
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT YOU VOTE FOR PROPOSALS ONE, TWO AND THREE.
 
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND DIRECTORS
 
Beneficial Ownership

The table below sets forth information known to us regarding the beneficial ownership of our Common Stock as of September 23, 2016 for:

·
each person our Company believes beneficially holds more than 5% of the outstanding shares of our Common Stock based solely on our review of SEC filings;

·
each of our directors;

·
each of the named executive officers named in the Summary Compensation Table under the heading “ Executive Compensation—Summary Compensation Table for Transition Period Ended December 31, 2015 ” (we collectively refer to these persons as our “named executive officers”); and

·
all of our directors and named executive officers as a group.

The number of shares beneficially owned by a person includes shares subject to options held by that person that are currently exercisable or that become exercisable within 60 days of September 23, 2016. Percentage calculations assume, for each person and group, that all shares that may be acquired by such person or group pursuant to options currently exercisable or that become exercisable within 60 days of September 23, 2016 are outstanding for the purpose of computing the percentage of Common Stock owned by such person or group. However, such unissued shares of Common Stock described above are not deemed to be outstanding for calculating the percentage of Common Stock owned by any other person.

Except as otherwise indicated, the persons in the table below have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable and subject to the information contained in the notes to the table.
 
Beneficial Ownership Table
 
PRE-TRANSACTION
 
Name and
Address of
Beneficial
Owner (1)
 
Total (2)
   
Percent of Class
 
Beneficial Owners of More than 5%
           
Nantahala Capital Management, LLC
19 Old Kings Highway S, Suite 200
Darien, CT 06820
   
3,134,956
     
11.8
%
Named Executive
Officers and
Directors
               
Lewis C. Pell
   
2,739,423
     
10.3
%
Dr. Cheryl Pegus
   
138,300
     
0.5
%
Howard I. Zauberman
   
462,299
     
1.7
%
Kenneth A. Samet
   
100,000
     
0.4
%
James A. D’Orta
   
100,000
     
0.4
%
Darin Hammers
   
438,737
     
1.7
%
Brett A. Reynolds
   
150,071
     
0.6
%
Total
   
7,263,786
     
27.4
%
Named Executive Officers and Directors Total
   
4,128,830
     
15.6
%
Shares Outstanding
   
26,544,299
     
100.0
%
 
POST TRANSACTION

Name and
Address of
Beneficial
Owner (1)
 
Total (2)
   
Percent of Class
 
Beneficial Owners of More than 5%
           
Nantahala Capital Management, LLC
19 Old Kings Highway S, Suite 200
Darien, CT 06820
   
3,134,956
     
5.2
%
Accelmed Growth Partners, L.P.
c/o Accelmed Growth Partners Management Ltd.
6 Hachoshlim St. 6 th Floor
Herzliya Pituach, 46120
   
16,129,032
     
26.7
%
Uri Geiger (3)(4)(5)
   
16,129,032
     
26.7
%
Nachum Shamir (3)(4)
   
--
     
-
 
Named Executive
Officers and
Directors
               
Lewis C. Pell
   
20,051,723
     
33.2
%
Dr. Cheryl Pegus
   
138,300
     
0.2
%
Howard I. Zauberman
   
462,299
     
0.8
%
Kenneth A. Samet
   
100,000
     
0.2
%
James A. D’Orta
   
100,000
     
0.2
%
Darin Hammers
   
438,737
     
0.7
%
Brett A. Reynolds
   
150,071
     
0.2
%
Total
   
40,705,118
     
67.4
%
Named Executive Officers and Directors Total
   
21,441,130
     
35.5
%
Shares Outstanding
   
60,361,754
     
100.0
%
 
(1)
The business address for each of the directors and named executive officers of the Company is c/o Cogentix Medical, Inc., 5420 Feltl Road, Minnetonka, Minnesota 55343.

(2)
The total represents the total number of shares of Common Stock, restricted shares and exercisable options/warrants held.

(3)
The business address for Uri Geiger is c/o Accelmed Growth Partners, L.P., 400 Madison Avenue, New York, New York 10017.  The business address for Nachum Shamir is c/o Luminex Corp., 12212 Technology Blvd, Austin, Texas 78727.

(4)
Following the closing of the Proposed Transaction, Messrs. Geiger and Shamir are expected to be named to the Board as designees of Accelmed in accordance with the terms of the Voting Agreement.

(5)
Uri Geiger is the controlling member and managing partner of Accelmed Growth Partners (AGP) Limited, which is the general partner of Accelmed Growth Partners (GP), L.P., which is the general partner of Accelmed, and as a result Dr. Geiger may be deemed to beneficially own the shares of Common Stock held by Accelmed. Uri Geiger is the controlling shareholder and managing partner of Accelmed Growth Partners Management Ltd., which has certain voting and dispositive power over the securities of the Company owned by Accelmed Growth Partners, L.P. pursuant to a management agreement, and as a result Dr. Geiger may be deemed to beneficially own the shares of Common Stock held by Accelmed.
 
OTHER BUSINESS
 
Stockholder Proposals for 2017 Annual Meeting

Stockholder proposals intended to be presented in our proxy materials relating to our next annual meeting of stockholders for our fiscal 2017 must be received by us on or before December 26, 2016 unless the date of the meeting is changed by more than 30 calendar days from the date of the annual meeting of stockholders for our fiscal 2016, and must satisfy the requirements of the proxy rules promulgated by the SEC.

For any other stockholder proposals to be presented at our next annual meeting of stockholders, Rule 14a-4(c) under the Exchange Act provides that if a proponent of a proposal fails to notify us at the address below at least 45 days prior to the month and day of mailing of the prior year’s proxy statement (or any date specified in an advance notice provision), then the management proxy holders will be allowed to use their discretionary voting authority with respect to the voting of proxies when the proposal is presented at the meeting, without any discussion of the matter in the proxy statement. With respect to our 2017 Annual Meeting of Stockholders, if we are not provided notice of a stockholder proposal, which the stockholder has not previously sought to include in our proxy statement, by March 11, 2017, the management proxy holders will be allowed to use their discretionary authority with respect to the voting of proxies.
 
Householding of Proxy Materials

Some banks, brokers and other nominee record holders may be participating in the practice of “householding” proxy statements and annual reports (or transition report). This means that only one copy of our proxy statement or annual report (or transition report) to stockholders may have been sent to multiple stockholders in each household unless otherwise instructed by such stockholders. We will deliver promptly a separate copy of either document to any stockholder upon written or oral request to our Corporate Secretary, at Cogentix Medical, Inc., 5420 Feltl Road, Minnetonka, Minnesota 55343, telephone:  (952) 426-6152.  Any stockholder who wants to receive separate copies of our proxy statement or annual report (or transition report) to stockholders in the future, or any stockholder who is receiving multiple copies and would like to receive only one copy per household, should contact the stockholder’s bank, broker, or other nominee record holder, or the stockholder may contact us at the above address and phone number.
 
Cost and Method of Solicitation

We pay the entire cost of the Special Meeting and the cost of soliciting the attached proxies. In addition to solicitation by mail, our directors, officers, employees and agents, without additional remuneration, may solicit proxies from our stockholders by personal interviews, telephone, fax or other electronic means. We have engaged The Proxy Advisory Group, LLC®, to assist in the solicitation of proxies and provide related advice and informational support, for a services fee and the reimbursement of customary disbursements that are not expected to exceed $30,000 in total. Arrangements also will be made with brokerage firms and other custodians, nominees and fiduciaries who are record holders of our Common Stock for the forwarding of solicitation materials to the beneficial owners of our Common Stock.  We will reimburse these brokers, custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses they incur in connection with the forwarding of solicitation materials.
 
Transaction of Other Business

The Board knows of no business to come before the meeting other than as stated in the Notice of Special Meeting of Stockholders.

Your vote is important. Whether or not you plan to attend the Special Meeting, please exercise your right to vote as soon as possible by completing, signing, dating and returning your proxy card or by using Internet or telephone voting as described on the voting instruction form or Notice Regarding the Availability of Proxy Materials.
 
 
By Order of the Board of Directors,
   
 
Darin Hammers
 
President and Chief Executive Officer
   
October 11, 2016
 
Minnetonka, Minnesota
 
 
1 1 12345678 12345678 12345678 12345678 12345678 12345678 12345678 12345678 NAME THE COMPANY NAME INC. - COMMON 123,456,789,012.12345 THE COMPANY NAME INC. - CLASS A 123,456,789,012.12345 THE COMPANY NAME INC. - CLASS B 123,456,789,012.12345 THE COMPANY NAME INC. - CLASS C 123,456,789,012.12345 THE COMPANY NAME INC. - CLASS D 123,456,789,012.12345 THE COMPANY NAME INC. - CLASS E 123,456,789,012.12345 THE COMPANY NAME INC. - CLASS F 123,456,789,012.12345 THE COMPANY NAME INC. - 401 K 123,456,789,012.12345 → x 02 0000000000 JOB # 1 OF 2 1 OF 2 PAGE SHARES CUSIP # SEQUENCE # THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED. KEEP THIS PORTION FOR YOUR RECORDS DETACH AND RETURN THIS PORTION ONLY TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date CONTROL # SHARES 0 0 0 0 0 0 0 0 0 0000300589_1 R1.0.1.25 COGENTIX MEDICAL, INC. 5420 FELTL ROAD MINNETONKA, MN 55343 Investor Address Line 1 Investor Address Line 2 Investor Address Line 3 Investor Address Line 4 Investor Address Line 5 John Sample 1234 ANYWHERE STREET ANY CITY, ON A1A 1A1 VOTE BY INTERNET - www.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Daylight Time on October 26, 2016. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Daylight Time on October 26, 2016. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. The Board of Directors recommends you vote FOR proposals 1, 2 and 3. For Against Abstain 1 A proposal to approve, as required by and in accordance with NASDAQ Rule 5635(b), the issuance of 16,129,033 shares of common stock, par value $0.01 per share, of the Company (the "Common Stock"), at a purchase price per share of $1.55, on the terms and subject to the conditions set forth in the Securities Purchase Agreement, dated as of September 7, 2016, between the Company and Accelmed Growth Partners, L.P., a Cayman Island exempted limited partnership. 2 A proposal to approve, as required by and in accordance with NASDAQ Rule 5635(b), the exchange of all the outstanding principal Broadridge Corporate Issuer Solutions C/O Cogentix Medical PO Box 1342 Brentwood, NY 11717 Investor Address Line 1 Investor Address Line 2 Investor Address Line 3 Investor Address Line 4 Investor Address Line 5 John Sample 1234 ANYWHERE STREET ANY CITY, ON A1A 1A1 234567 8 234567 8 234567 8 234567 8 234567 8 234567 8 1 1 1OF 2 VOTE BY INTERNET - www.proxyvote.com Use the Internet to transmit your voting instructions and for electronic delivery of information up until 11:59 P.M. Eastern Daylight Time on November 2, 2016. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and to create an electronic voting instruction form. ELECTRONIC DELIVERY OF FUTURE PROXY MATERIALS If you would like to reduce the costs incurred by our company in mailing proxy materials, you can consent to receiving all future proxy statements, proxy cards and annual reports electronically via e-mail or the Internet. To sign up for electronic delivery, please follow the instructions above to vote using the Internet and, when prompted, indicate that you agree to receive or access proxy materials electronically in future years. VOTE BY PHONE - 1-800-690-6903 Use any touch-tone telephone to transmit your voting instructions up until 11:59 P.M. Eastern Daylight Time on November 2, 2016. Have your proxy card in hand when you call and then follow the instructions. VOTE BY MAIL Mark, sign and date your proxy card and return it in the postage-paid envelope we have provided or return it to Vote Processing,
 
mers and Brett Reynolds, or either of them, as proxies, each with the power to appoint (his/her) substitute, and hereby authorizes them to represent and to vote, as designated on the reverse side of this ballot, all of the shares of Common stock of COGENTIX MEDICAL, INC. that the stockholder is entitled to vote at the Special Meeting of stockholders to be held at 08:30 AM, Central Daylight Time on November 3, 2016, at the Company's headquarters located at 5420 Feltl Road, Minnetonka, MN 55343, and any adjournment or postponement thereof. This proxy, when properly executed, will be voted in the manner directed herein. If no such direction is made, this proxy will be voted in accordance with the Board of Directors' recommendations. R1.0.1.29 2 _ 0000301244 Continued and to be signed on reverse side
 
EXHIBIT A
 
  
 
Confidential
September 7, 2016

Special Committee of the Board of Directors
Cogentix Medical Inc.
5420 Feltl Road
Minnetonka, MN 55343

Ladies and Gentlemen:
 
Cogentix Medical Inc. (“ Cogentix ” or the “ Company ”) has engaged Duff & Phelps, LLC (“ Duff & Phelps ”) to serve as an independent financial advisor to the Special Committee (the “ Special Committee ”) of the Board of Directors (the “ Board of Directors ”) of the Company to provide certain financial advisory services and an opinion, as described below, in connection with the Proposed Transaction described below.
 
Description of the Proposed Transaction
 
It is Duff & Phelps’ understanding that Accelmed Growth Partners, L.P. (“ Accelmed ”) is investing $25 million (the “ Investment ”) in Cogentix in exchange for newly issued shares of Cogentix’s common stock at a price of $1.55 per share (the Investment together with any other issuance of Cogentix’s common stock on the same terms as the Investment, the “ Capital Raise ”).  Furthermore, Lewis C. Pell is exchanging $29.5 million in face value of promissory notes (including approximately $1.0 million of accrued interest) payable by the Company into shares of Cogentix’s common stock at a price per share of $1.67 per share and all outstanding warrants to purchase Cogentix common stock that are held by Mr. Pell will be cancelled (the “ Note Exchange ”).  The Capital Raise and the Note Exchange (collectively referred to as the “ Proposed Transaction ”) would be conditioned upon the completion of the other.
 
Opinion
 
The Special Committee has requested that the Duff & Phelps analyze the fairness, from a financial point of view, to the unaffiliated public stockholders of the Company, of the financial terms of the Proposed Transaction, taken as a whole (without considering the fairness of either the Capital Raise or the Note Exchange independently and without giving effect to any impact of the Proposed Transaction on any particular stockholder other than in its capacity as a stockholder) (the “ Opinion ”).
 
Scope of Analysis
 
In connection with this Opinion, Duff & Phelps has made such reviews, analyses and inquiries as it has deemed necessary and appropriate under the circumstances.  Duff & Phelps also took into account its assessment of general economic, market and financial conditions, as well as its experience in securities and business valuation, in general Duff & Phelps’ procedures, investigations, and financial analyses with respect to the preparation of its Opinion included, but were not limited to, the following:
 
1.
Reviewed the following documents:
 
a.
The Company’s annual reports and audited financial statements on Form 10-K filed with the Securities and Exchange Commission (“ SEC ”) for the year ended March 31, 2015 and for the period April 1, 2015 through December 31, 2015 and the Company’s quarterly report and unaudited interim financial statements on Form 10-Q filed with the SEC for six months ended June 30, 2016;

Duff & Phelps, LLC
10100 Santa Monica Blvd.
Suite 1100
Los Angeles, CA 90067
T
F
 
+1 424 249 1650
+1 424 249 1651
www.duffandphelps.com
 
 
Cogentix Medical Inc.
Page 2 of 5
September 7, 2016

b.
Vision-Sciences, Inc.’s annual reports and audited financial statements on Form 10-K filed with the SEC for the years ended March 31, 2012 through 2014;
 
c.
Uroplasty, Inc.’s annual reports and audited financial statements on Form 10-K filed with the SEC for the years ended March 31, 2012 through 2014;
 
d.
Unaudited financial information for the Company for the year ended December 31, 2015 and seven months ended July 31, 2015 and July 31, 2016, respectively;
 
e.
Financial projections prepared by management of the Company for the years ending December 31, 2016 through 2020 (the “ Management Projections ”);
 
f.
Other internal documents relating to the history, current operations and probable future outlook of the Company provided to Duff & Phelps by management of the Company;
 
g.
Agreement and Plan of Merger dated December 21, 2014 by and among Vision-Sciences, Inc., Visor Merger Sub LLC and Uroplasty, Inc.;
 
h.
Documents related to the Company’s indebtedness, including the following three convertible promissory notes between the Company and Lewis C. Pell: (i) $20 million note dated September 19, 2012 and amendments thereto; (ii) $3.5 million note dated September 25, 2013 and amendments thereto; and (iii) $5 million note dated June 16, 2014 and amendments thereto, as well as a common stock purchase warrant by the Company in favor of Mr. Pell dated November 9, 2009 to purchase up to 272,727 shares of the Company common stock, a common stock purchase warrant by the Company in favor of Mr. Pell dated November 9, 2009 to purchase up to 378,788 shares of the Company common stock, and a common stock purchase warrant by the Company in favor of Mr. Pell dated September 30, 2011 to purchase up to 1,229,105 shares of common stock ;
 
i.
Documents related to the Proposed Transaction, including the term sheet dated August 8, 2016 between the Company and Accelmed (the “ Term Sheet ”) and the unsigned execution version of the Securities Purchase Agreement by and between the Company and Accelmed (the “ Definitive Agreement ”); and
 
j.
Various presentations and reports prepared by Company management, including debt financing updates presented to the Board of Directors;
 
2.
Discussed the information referred to above and the background and other elements of the Proposed Transaction with the management of the Company and with the Special Committee;
 
3.
Reviewed the historical trading prices and trading volume of the Company’s common stock and the publicly traded securities of certain other companies that Duff & Phelps deemed relevant;
 
4.
Performed certain valuation and comparative analyses using generally accepted valuation and analytical techniques, including a discounted cash flow analysis, an analysis of selected public companies and selected transactions that Duff & Phelps deemed relevant, and an analysis of selected publicly traded CCC rated debt that Duff & Phelps deemed relevant; and
 
5.
Conducted such other analyses and considered such other factors as Duff & Phelps deemed appropriate.
 
Cogentix Medical Inc.
Page 3 of 5
September 7, 2016
 
Assumptions, Qualifications and Limiting Conditions
 
In performing its analyses and rendering this Opinion with respect to the Proposed Transaction, Duff & Phelps, with the Company’s consent:
 
1.
Relied upon the accuracy, completeness, and fair presentation of all information, data, advice, opinions and representations obtained from public sources or provided to it from private sources, including Company management, and did not independently verify such information;
 
2.
Relied upon the fact that the Special Committee, the Board of Directors and the Company have been advised by counsel as to all legal matters with respect to the Proposed Transaction, including whether all procedures required by law to be taken in connection with the Proposed Transaction have been duly, validly and timely taken;
 
3.
Assumed that any estimates, evaluations, forecasts and projections furnished to Duff & Phelps, including the Management Projections, were reasonably prepared and based upon the best currently available information and good faith judgment of the person furnishing the same and Duff & Phelps expresses no opinion with respect to the same or the underlying assumptions;
 
4.
Assumed that information supplied and representations made by Company management are substantially accurate regarding the Company and the Proposed Transaction;
 
5.
Assumed that the final versions of all documents reviewed by Duff & Phelps in draft form conform in all material respects to the drafts reviewed;
 
6.
Assumed that there has been no material change in the assets, liabilities, financial condition, results of operations, business, or prospects of the Company since the date of the most recent financial statements and other information made available to Duff & Phelps, and that there is no information or facts that would make the information reviewed by Duff & Phelps incomplete or misleading;
 
7.
Assumed that all of the conditions required to implement the Proposed Transaction will be satisfied and that the Proposed Transaction will be completed in accordance with the Definitive Agreement without any amendments thereto or any waivers of any terms or conditions thereof; and
 
8.
Assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Proposed Transaction will be obtained without any adverse effect on the Company or the contemplated benefits expected to be derived in the Proposed Transaction.
 
To the extent that any of the foregoing assumptions or any of the facts on which this Opinion is based prove to be untrue in any material respect, this Opinion cannot and should not be relied upon.  Furthermore, in Duff & Phelps’ analysis and in connection with the preparation of this Opinion, Duff & Phelps has made numerous assumptions with respect to industry performance, general business, market and economic conditions and other matters, many of which are beyond the control of any party involved in the Proposed Transaction.
 
Duff & Phelps has prepared this Opinion effective as of the date hereof.  This Opinion is necessarily based upon market, economic, financial and other conditions as they exist and can be evaluated as of the date hereof, and Duff & Phelps disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting this Opinion which may come or be brought to the attention of Duff & Phelps after the date hereof.
 
Cogentix Medical Inc.
Page 4 of 5
September 7, 2016

Duff & Phelps did not evaluate the Company’s solvency or conduct an independent appraisal or physical inspection of any specific assets or liabilities (contingent or otherwise).  Duff & Phelps has not been requested to, and did not, (i) initiate or participate in any discussions with, or solicit any indications of interest from, third parties with respect to the Proposed Transaction, the assets, businesses or operations of the Company, or any alternatives to the Proposed Transaction, (ii) negotiate the terms of the Proposed Transaction, and therefore, Duff & Phelps has assumed that such terms are the most beneficial terms, from the Company’s perspective, that could, under the circumstances, be negotiated among the parties to the Term Sheet and the Proposed Transaction, or (iii) advise the Special Committee or the Board of Directors or any other party with respect to alternatives to the Proposed Transaction.
 
Duff & Phelps is not expressing any opinion as to the market price or value of the Company’s common stock (or anything else) after the announcement or the consummation of the Proposed Transaction.  This Opinion should not be construed as a valuation opinion, credit rating, solvency opinion, an analysis of the Company’s credit worthiness, as tax advice, or as accounting advice.  Duff & Phelps has not made, and assumes no responsibility to make, any representation, or render any opinion, as to any legal matter.
 
In rendering this Opinion, Duff & Phelps is not expressing any opinion with respect to the amount or nature of any compensation to any of the Company’s officers, directors, or employees, or any class of such persons, relative to the consideration to be received by the unaffiliated public stockholders of the Company in the Proposed Transaction, or with respect to the fairness of any such compensation.
 
This Opinion is furnished solely for the use and benefit of the Special Committee in connection with their consideration of the Proposed Transaction and is not intended to, and does not, confer any rights or remedies upon any other person, and is not intended to be used, and may not be used, by any other person or for any other purpose, without Duff & Phelps’ express consent. This Opinion (i) does not address the merits of the underlying business decision to enter into the Proposed Transaction versus any alternative strategy or transaction; (ii) does not address any transaction related to the Proposed Transaction; (iii) is not a recommendation as to how the Special Committee, the Board of Directors or any stockholder should vote or act with respect to any matters relating to the Proposed Transaction, or whether to proceed with the Proposed Transaction or any related transaction; and (iv) does not indicate that pricing of the Capital Raise or the financial terms of the Note Exchange are the best possibly attainable under any circumstances.  The decision as to whether to proceed with the Proposed Transaction or any related transaction may depend on an assessment of factors unrelated to the financial analysis on which this Opinion is based.  This letter should not be construed as creating any fiduciary duty on the part of Duff & Phelps to any party.
 
This Opinion is solely that of Duff & Phelps, and Duff & Phelps’ liability in connection with this letter shall be limited in accordance with the terms set forth in the engagement letter between Duff & Phelps and the Company dated July 6, 2016 and the addendum thereto dated August 1, 2016 (collectively, the “ Engagement Letter ”).  This letter is confidential, and its use and disclosure is strictly limited in accordance with the terms set forth in the Engagement Letter.
 
Cogentix Medical Inc.
Page 5 of 5
September 7, 2016

Disclosure of Prior Relationships
 
Duff & Phelps has acted as financial advisor to the Special Committee and will receive a fee for its services.  No portion of Duff & Phelps’ fee is contingent upon either the conclusion expressed in this Opinion or whether or not the Proposed Transaction is successfully consummated.  Pursuant to the terms of the Engagement Letter, a portion of Duff & Phelps’ fee is payable upon Duff & Phelps’ informing the Special Committee that it is prepared to deliver its Opinion.  Other than this engagement, during the two years preceding the date of this Opinion, Duff & Phelps has not had any material relationship with any party to the Proposed Transaction for which compensation has been received or is intended to be received, nor is any such material relationship or related compensation mutually understood to be contemplated.
 
Conclusion
 
Based upon and subject to the foregoing, Duff & Phelps is of the opinion that as of the date hereof, the financial terms of the Proposed Transaction, taken as a whole (without considering the fairness of either the Capital Raise or the Note Exchange independently) are fair to the unaffiliated public stockholders of the Company (without giving effect to any impact of the Proposed Transaction on any particular stockholder other than in its capacity as a stockholder).
 
This Opinion has been approved by the Opinion Review Committee of Duff & Phelps.
 
Respectfully submitted,
 
/s/ Duff & Phelps, LLC
Duff & Phelps, LLC
 
EXHIBIT B

AMENDED AND RESTATED BY-LAWS

OF

COGENTIX MEDICAL, INC.
 
ARTICLE 1 - Stockholders
 
1.1            Place of Meetings .  All meetings of stockholders shall be held at such place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the President or, if not so designated, at the registered office of the corporation.
 
1.2            Annual Meeting .  The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Board of Directors, the Chairman or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Board of Directors, the Chairman or the President and stated in the notice of the meeting.  If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these By-Laws to the annual meeting of the stockholders shall be deemed to refer to such special meeting.
 
1.3            Special Meetings .  Special meetings of stockholders may be called at any time by the Chairman or the President or by the Board of Directors.  Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting.
 
1.4            Notice of Meetings .  Except as otherwise provided by law, written notice of each meeting of stockholders, whether annual or special, shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting.  The notices of all meetings shall state the place, date and hour of the meeting.  The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called.  If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation.
 
1.5            Voting List .  The officer who has charge of the stock ledger of the corporation shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder.  Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, at a place within the city where the meeting is to be held.  The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present.
 
1.6            Quorum .  Except as otherwise provided by law, the Certificate of Incorporation or these By-Laws, the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business.
 
1.7            Adjournments .  Any meeting of stockholders may be adjourned to any other time and to any other place at which a meeting of stockholders may be held under these By-Laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting.  It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting.  At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting.
 
1.8            Voting and Proxies .  Each stockholder shall have one vote for each share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided in the Certificate of Incorporation.  Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for him by proxy authorized by an instrument in writing, by a transmission or another method permitted by law and in accordance with the procedures established for the meeting.  A copy, facsimile telecommunication or other reliable reproduction of the writing, transmission or telecommunication created pursuant to this section may be substituted or used in lieu of the original writing, the transmission or telecommunication that could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing, transmission or telecommunication.  No such proxy shall be voted or acted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period.
 
1.9            Action at Meeting .  When a quorum is present at any meeting, the holders of a majority of the stock present or represented and voting on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of a majority of the stock of that class present or represented and voting on a matter) shall decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-Laws.  Any election by stockholders shall be determined by a plurality of the votes cast by the stockholders entitled to vote at the election.
 
ARTICLE 2 - Directors
 
2.1            General Powers .  The business and affairs of the corporation shall be managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law or the Certificate of Incorporation.  In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled.
 
2.2            Number of Directors .  The number of directors of the corporation shall not be less than seven.  The exact number of directors within the limitations specified in the preceding sentence shall be fixed from time to time pursuant to a resolution adopted by the Board of Directors.
 
2.3            Quorum; Action at Meeting .  A majority of the directors at any time in office shall constitute a quorum for the transaction of business.  In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified, provided that in no case shall less than one-third of the number of directors fixed pursuant to Section 2.2 above constitute a quorum.  If at any meeting of the Board of Directors there shall be less than such a quorum, a majority of those present may adjourn the meeting from time to time.  Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors unless a greater number is required by law, by the By-laws of the corporation or by this Certificate of Incorporation.
 
2.4            Vacancies .  Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by a vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director.  A director elected to fill a vacancy shall be elected to hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of his/her successor and to his/her earlier death, resignation or removal.
 
2.5            Resignation .  Any director may resign by delivering his written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event.
 
2.6            Regular Meetings .  Regular meetings of the Board of Directors may be held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination.  A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders.
 
2.7            <