HMNY Helios and Matheson Analytics Inc (CE)

PROPOSAL 1

TO APPROVE AN AMENDMENT TO THE COMPANY’S CERTIFICATE OF INCORPORATION, AS AMENDED, TO EFFECT A REVERSE SPLIT OF THE COMPANY’S COMMON STOCK

(the Reverse Split Proposal)

The Board has unanimously adopted a resolution authorizing, approving, declaring advisable and recommending to the Company’s stockholders for their approval an amendment to the Company’s certificate of incorporation to effect a reverse split of the outstanding shares of the Company’s common stock in a ratio of 1 share -for-2 shares up to a ratio of 1 share -for-1 ,000 shares (the “Reverse Split Amendment”), which ratio will be selected by the Board following stockholder approval and prior to the time of filing of a certificate of amendment with the Delaware Secretary of State and set forth in a public announcement. The Company previously sought stockholder approval of an amendment similar to the Reverse Split Amendment, as described in the proxy materials filed with the Commission on September 26, 2018 and January 29, 2019, but such approval was not obtained and the proposed reverse stock split was not effected. The Company now resubmits the proposal for the reasons described below. The proposed form of Reverse Split Amendment and Authorized Shares Reduction Amendment is attached to this proxy statement as Annex A.

The Board believes that a reverse split of our common stock is necessary to facilitate the Company’s stock being quoted on OTCQB ® Venture Market or a national securities exchange and to make the Company’s stock more attractive to a broader range of institutional and other investors, as described below.

To alleviate the potential dilutive effect of the Reverse Split Amendment, following which the ratio of authorized common stock to issued and outstanding common stock will be higher than prior to the Reverse Split Amendment, the Company is also seeking approval of the Authorized Shares Reduction Proposal to decrease the number of authorized shares of common stock 5,000,000,000 to 2,000,000,000. As a result, if Proposal 2 is approved by stockholders, the number of shares of common stock authorized for future issuance following the Reverse Split Amendment will be limited to a total of 2,000,000,000 shares.

As of April 3, 2019, 3,001,394,590 shares of common stock were outstanding. If Proposal 1 is approved at the Special Meeting, the Company may issue the shares of common stock that would become available for issuance upon completion of any reverse stock split (i) pursuant to future securities offering transactions, (ii) pursuant to future acquisition transactions involving payment of consideration in equity securities of the Company, (iii) other general corporate purposes, and (iv) as of April 3, 2019, upon conversion or exercise of securities of the Company that are convertible into or exercisable for common stock, as described below:

•         10,440 shares of common stock available and reserved for issuance pursuant to the Helios and Matheson Analytics Inc. 2014 Equity Incentive Plan;

•         29,364 shares of common stock that may be issued upon the exercise of warrants by Palladium Capital Advisors LLC;

•         10,201 shares of common stock issuable upon the exercise of warrants issued to Oath Inc. upon the closing of the acquisition of Moviefone assets in April 2018;

•         2,000 shares of common stock reserved for issuance to Helios and Matheson Information Technology Ltd. in exchange for entering into prior lockup agreements and a new 12 -month lockup agreement;

•         18,545 shares of common stock reserved for issuance to various officers and consultants;

•         16,000 shares of common stock issuable to MoviePass Inc. (“MoviePass”) upon receipt of stockholder approval and conversion of the convertible promissory note in the principal amount of $12 million that we issued to MoviePass upon the closing of the Securities Purchase Agreement, dated August 15, 2017, between the Company and MoviePass;

•         1,000,000,002 shares of common stock issuable upon the conversion of the Series C Common Stock Purchase Warrants, Series D Common Stock Purchase Warrants and Series E Common Stock Purchase Warrants issued by the Company on January 16, 2019 (the “January 2019 Warrants”);

•         26,666,667 shares of common stock issuable upon the exercise of certain warrants issued to the placement agent in connection with the January 2019 Warrants;

•         166,670 shares of common stock issuable upon conversion of outstanding shares of Series B Preferred Stock;

•         996,019,920 shares of common stock issuable upon conversion of Series B Preferred Stock issuable upon exercise of Series F -1 Preferred Stock Purchase Warrants issued by the Company on March 25, 2019 the (the “Series F -1 Warrants”);

•         if stockholder approval of the Reverse Split Proposal is obtained, 80,001,600 shares of common stock issuable upon the conversion of Series B Preferred Stock issuable upon exercise of warrants issued to the placement agent in connection with the Series F -1 Warrants;

•         if stockholder approval of the Reverse Split Proposal is obtained, 1,004,020,080 shares of common stock issuable upon conversion of 60,240 shares of Series B Preferred Stock 1 which would be issuable upon exercise of potential warrants that the Company may issue, in its sole discretion, in exchange for principal of and interest on outstanding debentures with an aggregate principal amount of $2.1 million that we issued to certain investors on April 30, 2019, as described in our Current Report on Form 8 -K filed on May 1, 2019 (the “Debentures,” and such potential exchange, the “Debenture Exchange”, and such potential warrants, the “Series F -2 Warrants”); and

•         50,886 shares of common stock issuable upon the exercise of other warrants issued in public offerings.

The lack of adequate authorized shares of common stock available to issue upon conversion of the Series B Preferred Stock issuable upon exercise of the Series F -2 Warrants (if re -issued pursuant to the Debenture Exchange) and pursuant to future equity financings could materially limit or delay the Company’s ability to obtain capital as and when needed or consummate future acquisitions involving the payment of consideration in shares of our common stock. Effecting the Reverse Split Amendment would enable the Company to satisfy its reserve requirements under the warrants and create additional unreserved shares available for future equity financings and acquisitions.

If the Board determines to implement the Reverse Split Amendment following stockholder approval, the Company would communicate to the public, prior to the effective time of the Reverse Split Amendment, additional details regarding the Reverse Split Amendment (including the final reverse stock split ratio, as determined by the Board). The Board reserves the right to elect not to proceed with the Reverse Split Amendment if it determines, in its sole discretion, that the Reverse Split Amendment is no longer in the best interests of the Company or its stockholders.

In determining which reverse split ratio to implement, if any, following receipt of stockholder approval of this Proposal 1, the Board may consider, among other things, various factors, such as:

•         the historical trading price and trading volume of our common stock;

•         which reverse stock split amendment will permit us to issue, in our discretion, Series F -2 Warrants in the Debenture Exchange;

•         the then -prevailing trading price and trading volume of our common stock and the expected impact of a reverse split on the trading market for our common stock in the short- and long -term ;

•         the Company’s ability to have its common stock quoted on the OTCQB ® Venture Market;

•         which reverse stock split ratio would result in the least administrative cost to us; and

•         prevailing general market and economic conditions.

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​ 1     These numbers do not include up to 9,819 shares of Series B Preferred Stock issuable upon exchange of interest accrued on the principal amount of the Debentures as of their maturity date, and up to 163,653,273 shares of our common stock issuable upon conversion of such shares of Series B Preferred Stock.

The failure of stockholders to approve this Proposal 1 would prevent the Company from having its common stock quoted on higher tier over -the-counter markets maintained by OTC Markets Group Inc. (“OTC”), thereby adversely impacting the liquidity of our common stock and our stockholders’ ability to liquidate it. As discussed below, Nasdaq delisted our common stock effective at the open of business on February 13, 2019. As a result, our common stock trades on the OTC Pink, which does not have the substantial corporate governance or quantitative listing requirements for continued trading that Nasdaq has or even the requirements for continued trading that OTCQB ® Venture Market has.

Reasons for the Reverse Split

To provide the Company with flexibility to issue Series F -2 Warrants in exchange for princip a l and interest due under the Debentures.

On March 25, 2019, the Company sold securities in the aggregate gross offering price of $6,000,000.00 (the “Offering”), consisting of (A) 60,000 shares of Series B Preferred Stock (each, a “Preferred Share”), with each Preferred Share convertible into 16,667 shares of the Company’s common stock, provided that the holder will be prohibited from converting Preferred Shares into shares of our common stock if, as a result of such conversion, the holder, together with its affiliates, would beneficially own more than 9.99% of the total number of shares of our common stock then issued and outstanding after giving effect to such conversion, (B) Series F -1 Warrants to purchase an aggregate of 59,760 Preferred Shares and (C) Series F -2 Warrants (the Series F -2 Warrants together with the Series F -1 Warrants, collectively, the “Warrants”) to purchase an aggregate of 60,240 Preferred Shares.

On April 30, 2019, the Company exchanged the Series F -2 Warrants for $2.1 million aggregate principal amount of Debentures and the Series F -2 Warrants were cancelled. Pursuant to the terms of the Debentures, we may, in our sole discretion, exchange principal and interest due under the Debentures for new Series F -2 Warrants pursuant to the Debenture Exchange if the Reverse Split Proposal is approved.

The exercise price of the Series F -2 Warrants, if re -issued pursuant to the Debenture Exchange, will be $100.00 per Preferred Share. The Series F -2 Warrants will be exercisable, if re -issued pursuant to the Debenture Exchange, for five years following the issuance date. The exercise price of the Series F -2 Warrants, if re -issued pursuant to the Debenture Exchange, will be subject to adjustment as follows:

•         until the date that we consummate more than $4 million of Dilutive Issuances (as described below), if we issue any shares of common stock, or securities convertible into, or exercisable or exchangeable for shares of common stock, at a price less than the then exercise price divided by the then conversion rate of the Series B Preferred Stock (the “Threshold Price”), which issuances we refer to as Dilutive Issuances, then the exercise price of the Series F -2 Warrants will automatically be reduced to an amount equal to the then exercise price multiplied by the quotient obtained by dividing the lower issuance price by the then Threshold Price, provided that the exercise price will not be lower than $0.01 in any event; and

•         if we complete a reverse or forward stock split or reclassification of our common stock, and during the five trading days following such reverse or forward stock split or reclassification, the market price (as calculated pursuant to the terms of the Series F -2 Warrants) is less than the exercise price in effect immediately before the reverse or forward stock split or reclassification divided by the conversion rate of the Series B Preferred Stock, the exercise price will automatically be reduced to an amount equal to the then exercise price multiplied by the quotient obtained by dividing the market price (as calculated pursuant to the terms of the Series F -2 Warrants) by the then Threshold Price, provided that the exercise price will not be lower than $0.01 in any event.

If we do not obtain stockholder approval of the Reverse Split Proposal, then we will not have sufficient authorized shares available for issuance to consummate the Debenture Exchange and re -issue the Series F -2 Warrants, in which case the Debentures will remain outstanding and we will be obligated to repay the Debentures in cash in accordance with their terms. The Debentures mature on November 1, 2020 and bear interest at the rate of 12% per year. Such repayment obligation could have a material adverse effect on our business, results of operations and financial condition.

To quote our common stock on OTCQB ® Venture Market.

An additional reason for implementing a reverse split of our common stock would be to increase the per share market price of our common stock in an attempt to quote our stock on OTCQB ® Venture Market. On June 21, 2018, we received a deficiency letter from the Nasdaq Listing Qualifications Department (the “Staff”) notifying us that the bid price of our common stock had closed below the required $1.00 per share for 30 consecutive trading days, and, accordingly, that we did not comply with Nasdaq’s $1.00 minimum bid price requirement (the “Minimum Bid Price Requirement”). On December 19, 2018, we received a written notice from the Staff that we had not regained compliance with the Minimum Bid Price Requirement and were not eligible for a second 180 -day period because the Staff determined that we would not be able to cure the deficiency. Although the Company timely appealed the Staff’s determination and requested a hearing before the Nasdaq Hearings Panel (the “Panel”), the Panel determined on February 11, 2019 to delist the Company’s common stock from The Nasdaq Capital Market. The suspension of trading in the Company’s common stock on the Nasdaq Capital Market became effective at the open of business on February 13, 2019.

The Company’s shares are currently quoted on the OTC Pink Market operated by OTC Markets Group Inc., under the symbol “HMNY.” The Board believes that it is in the best interests of the Company and its stockholders to have its common stock quoted on the OTCQB ® Venture Market because this market is generally considered to be more efficient and more widely followed than the OTC Pink Market, leading to potentially greater liquidity of our stock.

We believe that a reverse split of our common stock would increase the likelihood that our common stock could be quoted on the OTCQB ® Venture Market or listed in the future on a national securities exchange. The listing rules of the OTCQB ® Venture Market require, among other things, that issuers maintain a minimum closing bid price of at least $0.01 per share. By potentially increasing the market price of our common stock as a result of the Reverse Split Amendment, the Company would be more likely to qualify for the OTCQB ® Venture Market designation.

To potentially improve the liquidity of our common stock.

A reverse split of our common stock could allow a broader range of institutions to invest in our common stock (namely, funds that are prohibited from buying stocks whose price is below a certain threshold), potentially increasing trading volume and liquidity of our common stock and potentially decreasing the volatility of our common stock if institutions become long -term holders of our common stock. A reverse split of our common stock could help increase analyst and broker interest in our common stock as their policies can discourage them from following or recommending companies with low stock prices. Because of the trading volatility often associated with low -priced stocks, many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low -priced stocks or tend to discourage individual brokers from recommending low -priced stocks to their customers. Some of those policies and practices may make the processing of trades in low -priced stocks economically unattractive to brokers. Additionally, because brokers’ commissions on low -priced stocks generally represent a higher percentage of the stock price than commissions on higher -priced stocks, a low average price per share of common stock can result in individual stockholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were higher.

Certain Risks Associated with a Reverse Split

Following the effectiveness of any Reverse Split Amendment implemented by our Board following stockholder approval, we will have additional shares of our common stock available to issue upon conversion or exercise of securities of the Company that are convertible into or exercisable for common stock, including the 1,004,020,080 shares of common stock 2 that we may issue upon conversion of Series B Preferred Stock that is issuable upon exercise of Series F -2 Warrants, if the Company determines to re -issue the Series F -Warrants , in its sole discretion, pursuant to the Debenture Exchange. In addition, we will continue to require significant proceeds from sales of our debt or equity securities to fund our operations for the near future, which will cause further dilution to stockholders. The issuance of a substantial amount of shares of common stock or securities convertible into or exercisable for common stock in the future could cause downward pressure on the price of our common stock and there is no assurance that the market price for the common stock will remain at a level sufficient to satisfy the minimum bid price requirement of the OTCQB ® Venture Market.

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​ 2     This number does not include up to 163,653,273 shares of our common stock issuable upon conversion of up to 9,819 shares of Series B Preferred Stock issuable upon exchange of interest accrued on the principal amount of the Debentures as of their maturity date.

Moreover, the total market capitalization of our common stock after the implementation of a reverse split of our common stock may be lower than the total market capitalization before such reverse split. On the trading day immediately before 1 share -for-250 share reverse split of our common stock effected on July 24, 2018 (the “July 2018 Reverse Stock Split”), our market capitalization was $37.9 million, with 421,299,736 shares of common stock outstanding. Immediately after giving effect to the July 2018 Reverse Stock Split, we had 1,750,979 shares issued and outstanding. As of April 3, 2019, our market capitalization was $13.5 million, notwithstanding that we had approximately 3 billion shares outstanding as of that date.

There can be no assurance that a reverse split of our common stock will increase the market price of our common stock and have the desired effect of enabling compliance with the minimum bid price requirements of the OTCQB ® Venture Market. The Board believes that a reverse split of our common stock has the potential to increase the market price of our common stock so that the Company may be able to satisfy such requirements. However, the long- and near -term effect of a reverse split of our common stock upon the market price of our common stock cannot be predicted with any certainty. For instance, the July 2018 Reverse Stock Split did not enable the Company to regain compliance with Nasdaq’s Minimum Bid Price Requirement, and the history of similar reverse stock splits for companies in like circumstances is varied, particularly since investors may view a reverse split negatively. There can be no assurance that another reverse split will increase the market price of our common stock so that our common stock may become eligible for quotation on the OTCQB ® Venture Market tier.

Further, a reverse split may not result in a per share price of our common stock that would attract brokers and investors who do not trade in lower priced stocks.

Impact of a Reverse Stock Split if Implemented

A reverse split of our common stock would affect all of our common stockholders uniformly and would not affect any stockholder’s percentage ownership interests or proportionate voting power. The other principal effects of a reverse split of our common stock will be that:

•         the number of issued and outstanding shares of our common stock will be reduced proportionately based on the final reverse stock split ratio, as determined by the Board after stockholder approval of the Reverse Split Amendment;

•         if Proposals 1 and 2 are approved, the number of authorized shares of our common stock will be reduced from 5,000,000,000 to 2,000,000,000;

•         based on the final reverse split ratio, the per share exercise price of all of our outstanding options and warrants will be increased proportionately and the number of shares of our common stock issuable upon the exercise of all of our outstanding options and warrants will be reduced proportionately;

•         the number of shares of our common stock reserved for issuance and any maximum number of shares of our common stock with respect to which equity awards may be granted to any participant under the Company’s 2014 Equity Incentive Plan will be reduced proportionately based on the final reverse split ratio; and

•         the number of shares of our authorized common stock that are unissued and not reserved for future issuance will increase. However, if Proposals 1 and 2 are approved, the number of authorized shares of our common stock that will be available for issuance cannot exceed 2,000,000,000.

Although the number of outstanding shares of our common stock would decrease following the implementation of the Reverse Split Amendment by our Board after stockholder approval of the Reverse Split Amendment, the Board does not intend for a reverse split to be the first step in a “going private transaction” within the meaning of Rule 13e -3 of the Exchange Act.

The following table reflects the number of shares of common stock that would be outstanding as a result of the effectiveness of the Authorized Shares Reduction Amendment and the Reverse Split Amendment and the approximate percentage reduction in the number of outstanding shares of our common stock based on 3,001,394,590 shares of common stock issued and outstanding as of April 3, 2019. As of April 3, 2019, we had 1,998,605,410 shares of common stock available for issuance and were required to reserve for issuance upon conversion or exercise of convertible securities an additional 3,107,012,375 shares, including

1,004,020,080 3 shares that we may issue upon conversion of the Series B Preferred Stock issuable upon exercise of the Series F -2 Warrants, if the Company determines to re -issue the Series F -2 Warrants, in its sole discretion, pursuant to the Debenture Exchange. The following table also shows the shares of our common stock that would be unreserved and available for issuance if the Reverse Split Amendment and the Authorized Shares Reduction Amendment are effected.

Effect of Reverse Split and Potential Anti-Takeover Effect

Management does not anticipate that our financial condition, the percentage ownership of our common stock by management, the number of our stockholders, or any aspect of our business will materially change as a result of the implementation of the Reverse Split Amendment. Because, if implemented, the Reverse Split Amendment will apply to all outstanding shares of our common stock, the implementation of the proposed Reverse Split Amendment will not alter the relative rights and preferences of existing stockholders. However, the number of shares of our common stock outstanding will be decreased, while the number of authorized shares of our common stock available for issuance will be increased.

Management does not currently plan to use the increase in our available authorized but unissued shares of common stock that will result from the implementation of the Reverse Split Amendment to make it more difficult or to discourage a future merger, tender offer or proxy contest or the removal of incumbent management. This Proposal 1 is not the result of management’s knowledge of an effort to accumulate our securities or to obtain control of the Company by means of a merger, tender offer, solicitation or otherwise.

Summarized in the following paragraphs are provisions included in our certificate of incorporation, as amended, and our bylaws that may have the effect of discouraging, delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by our stockholders.

Effects of authorized but unissued common stock and blank check preferred stock.     One of the effects of the existence of authorized but unissued common stock and undesignated preferred stock may be to enable our Board to make more difficult or to discourage an attempt to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of management. If the Board were to determine that a takeover proposal was not in the best interest of our stockholders, such shares could be issued by the Board without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent stockholder group, by putting a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.

In addition, our certificate of incorporation grants our Board broad power to establish the rights and preferences of authorized and unissued shares of additional series of preferred stock. The creation and issuance of one or more additional series of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of our common stock. The issuance also may adversely affect the rights and powers, including voting rights, of those holders and may have the effect of delaying, deterring or preventing a change in control of the Company.

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​ 3     This number does not include up to 163,653,273 shares of our common stock that we may issue upon conversion of up to 9,819 shares of Series B Preferred Stock issuable upon exchange of interest accrued on the principal amount of the Debentures as of their maturity date.

Cumulative Voting.     Our certificate of incorporation does not provide for cumulative voting in the election of directors which would allow holders of less than a majority of the voting stock to elect some directors.

Vacancies.     Section 223 of the Delaware General Corporation Law and our bylaws provide that all vacancies, including newly created directorships, may be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum.

Special Meeting of Stockholders.     A special meeting of stockholders may be called by our Board or the Chairman of our Board and must be called by our Secretary at the request in writing of holders of record of a majority of our outstanding capital stock entitled to vote. The requirement that a majority of our outstanding capital stock is required to call a special meeting means that small stockholders will not have the power to call a special meeting to, for example, elect new directors.

Fractional Shares

The implementation of a reverse split of our common stock by our Board after approval by the Reverse Split Amendment by our stockholders may result in fractional shares, which the Company will not issue. Instead the Company will, at the discretion of the Board, determine whether to (i) issue additional fractions of a share to holders that would otherwise be entitled to a fractional share upon the effectiveness of the reverse split so that such holders receive whole numbers of shares, or (ii) pay cash in an amount equal to the fair value of the fractions of a share.

Procedure for Effecting the Reverse Split

If the Board decides to implement a reverse split of our common stock following stockholder approval of the Reverse Split Amendment, such reverse split will become effective on the date the Reverse Split Amendment is filed with the Secretary of State of the State of Delaware. The time of such filing, if any, will be determined by the Board in its sole discretion. Beginning on the effective time of the Reverse Split Amendment, each certificate representing pre -reverse stock split shares of common stock will be deemed for all corporate purposes to evidence ownership of post -reverse stock split shares of common stock.

Certain U.S. Federal Income Tax Consequences of the Reverse Split

The following discussion is a general summary of certain U.S. federal income tax consequences of the reverse stock split that may be relevant to U.S. Holders (as defined below) of our common stock, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non -U .S. tax laws are not discussed. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury regulations promulgated thereunder (the “Treasury Regulations”), judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (“IRS”), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a holder of our common stock. We have not sought and will not seek an opinion of counsel or any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the reverse stock split.

This discussion is limited to holders that hold our common stock as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all aspects of U.S. federal income tax consequences relevant to such holders’ particular circumstances, including the impact of the tax on net investment income imposed by Section 1411 of the Code. In addition, it does not address consequences relevant to holders subject to particular rules, including, without limitation:

•         persons that are not U.S. Holders (as defined below);

•         persons subject to the alternative minimum tax;

•         U.S. Holders (as defined below) whose functional currency is not the U.S. dollar;

•         persons holding our common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;

•         banks, insurance companies or other financial institutions;

•         real estate investment trusts or regulated investment companies;

•         brokers, dealers or traders in securities;

•         S corporations, partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein);

•         tax -exempt organizations or governmental organizations;

•         persons deemed to sell our common stock under the constructive sale provisions of the Code;

•         persons who hold or receive our common stock pursuant to the exercise of any employee stock option or otherwise as compensation; and

•         tax -qualified retirement plans.

If an entity treated as a partnership for U.S. federal income tax purposes holds our common stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding our common stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.

THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INTENDED AS TAX ADVICE. HOLDERS OF OUR COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT ARISING UNDER OTHER U.S. FEDERAL TAX LAWS (INCLUDING ESTATE AND GIFT TAX LAWS), UNDER THE LAWS OF ANY STATE, LOCAL OR NON -U .S. TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.

For purposes of the discussion below, a “U.S. Holder” is a beneficial owner of shares of our common stock that for U.S. federal income tax purposes is or is treated as: (1) an individual who is a citizen or resident of the United States; (2) a corporation created or organized under the laws of the United States, any state thereof, or the District of Columbia; (3) an estate the income of which is subject to U.S. federal income tax regardless of its source; or (4) a trust that (a) is subject to the primary supervision of a U.S. court and the control of one of more “United States persons” (within the meaning of Section 7701(a)(30) of the Code), or (b) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.

A reverse split of our common stock should constitute a “recapitalization” for U.S. federal income tax purposes. As a result, a U.S. Holder generally should not recognize gain or loss upon any reverse split of our common stock, except with respect to cash received in lieu of a fractional share of our common stock. A U.S. Holder’s aggregate tax basis in the shares of our common stock received pursuant to a reverse split of our common stock should equal the aggregate tax basis of the shares of our common stock surrendered (excluding any portion of such basis that is allocated to any fractional share of our common stock), and such U.S. Holder’s holding period in the shares of our common stock received should include the holding period in the shares of our common stock surrendered. Treasury Regulations provide detailed rules for allocating the tax basis and holding period of the shares of our common stock surrendered to the shares of our common stock received pursuant to a reverse split of our common stock. Holders of shares of our common stock acquired on different dates and at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of such shares.

Information Reporting and Backup Withholding.     A U.S. Holder (other than corporations and certain other exempt recipients) may be subject to information reporting and backup withholding when such holder receives cash in lieu of a fractional share of our common stock pursuant to a reverse split. A U.S. Holder will be subject to backup withholding if such holder is not otherwise exempt and such holder does not provide its taxpayer identification number in the manner required or otherwise fails to comply with applicable backup withholding tax rules. Backup

withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be refunded or allowed as a credit against the U.S. Holder’s federal income tax liability, if any, provided the required information is timely furnished to the IRS. U.S. Holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an exemption.

Vote required to pass Proposal 1

Proposal 1 will be approved if a quorum is present at the Special Meeting and the holders of (i) a majority of the voting power of outstanding shares of our common stock and the Preferred Stock, voting together as a single class, voted “for” such approval, (ii) a majority of the voting power of the outstanding shares of the Series A Preferred Stock, voting separately as a single class, vote “for” such approval, and (iii) a majority of the voting power of the outstanding shares of the Series B Preferred Stock, voting separately as a single class, vote “for” such approval. Abstentions will have the effect of a vote against Proposal 1. If Proposal 1 is approved and the Board decides to implement the Reverse Split Amendment, the Reverse Split Amendment will become effective on the date that the Reverse Split Amendment is filed with the Secretary of State of the State of Delaware, which time, if at all, will be determined by the Board in its sole discretion. The Board reserves the right at any time before the effective time of the Reverse Split Amendment, notwithstanding approval of Proposal 1 by the Company’s stockholders, to abandon the Reverse Split Amendment without further action by the stockholders. If Proposal 1 is not approved, the Reverse Split Amendment will not be filed with the Secretary of State of the State of Delaware.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” APPROVAL OF THE
REVERSE SPLIT AMENDMENT.