IN THE UNITED STATES BANKRUPTCY COURT FOR · PDF fileadversary complaint ... in the united...

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re Chapter 11 KALOBIOS PHARMACEUTICALS, INC., Case No. 15-12628 (LSS) Debtor.1

GREGORY REA, RTAT LLC, EDWARD H. PAINTER, NANCY RETZLAFF, ARMISTICE CAPITAL MASTER FUND, LTD, ANDREW PIZZO, AND SABINE GRITTI,

Plaintiffs,

v. KALOBIOS PHARMACEUTICALS, INC.,

Defendant.

Adv. Case No. 16-50001 (LSS) Requested Objection Deadline: May 5, 2016, at 12:00 p.m. (ET) Requested Hearing Date: May 6, 2016, at 9:30 a.m. (ET)

DEBTOR’S MOTION PURSUANT TO 11 U.S.C. § 105(a), 363 AND 502 AND FED. R. BANKR. P. 9019 APPROVING SETTLEMENT STIPULATION BY AND BETWEEN (I)

THE DEBTOR AND (II) THE SETTLING PIPE PLAINTIFFS

KaloBios Pharmaceuticals, Inc., as debtor and debtor in possession (the “Debtor” or

“KaloBios”) in the above-captioned chapter 11 case hereby moves (the “Motion”), pursuant to

sections 105(a), 363, and 502 of title 11 of the United States Code (the “Bankruptcy Code”) and

Rule 9019 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) for entry of

an order, substantially in the form attached hereto as Exhibit A (the “Proposed Order”),

approving the settlement stipulation, a copy of which is annexed to the Proposed Order as

Exhibit 1 (the “Stipulation”), by and between (i) the Debtor and (ii) each PIPE Plaintiff (as

defined herein) that has executed the Stipulation (the “Settling PIPE Plaintiffs,” and together

1 The last four digits of the Debtor’s federal tax identification number are 7236. The Debtor’s

address is 1000 Marina Blvd #250, Brisbane, CA 94005-1878.

Case 15-12628-LSS Doc 389 Filed 05/02/16 Page 1 of 20

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with the Debtor, the “Parties”) resolving, among other things, the above-captioned adversary

proceeding (the “PIPE Litigation”). In support of this Motion, the Debtor respectfully states as

follows:

PRELIMINARY STATEMENT

1. The Debtor is pleased to report that it has reached a settlement with the Settling

PIPE Plaintiffs that will enable it to pursue confirmation of a chapter 11 plan of reorganization

without the burden, expense and uncertainty of the PIPE Litigation. If the Stipulation is

promptly approved, a substantial amount of litigation among the Parties will cease, and the

Parties and other parties in interest in the Debtor’s chapter 11 case will have certainty as to how

the PIPE Plaintiffs’ claims will be treated in the Debtor’s plan. Avoiding the continued burden,

expense and uncertainty of the PIPE Litigation and agreeing to the treatment of the PIPE

Plaintiffs’ claims greatly increases the likelihood that the Debtor will be successful in exiting

chapter 11 in the timeframe contemplated by its deals with Savant (defined below) and the

prospective providers of its exit financing package. For these reasons, and the reasons discussed

herein, the Debtor submits that approving the Stipulation is the best interests of its estate,

creditors, shareholders and other parties in interest.

JURISDICTION

2. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and

1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2), and the

Court may enter a final order consistent with Article III of the United States Constitution. Venue

is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

3. The bases for the relief requested herein are sections 105(a), 363 and 502 of the

Bankruptcy Code and Bankruptcy Rule 9019.


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BACKGROUND

4. On December 29, 2015 (the “Petition Date”), the Debtor filed a voluntary petition

for relief under chapter 11 of title 11 of the United States Code (as amended, the “Bankruptcy

Code”). The Debtor continues to operate its business as debtor in possession pursuant to sections

1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner or committee has been

appointed in this chapter 11 case.

Events Leading to the Chapter 11 Case

5. The events leading to the Debtor seeking relief under chapter 11 have been well

chronicled in the Parties’ papers, open court, and the press, so the Debtor will only briefly

summarize them here.

6. The Debtor is a publicly traded biopharmaceutical company. In November 2015,

an investor group comprising Martin Shkreli and others acquired more than 50% of the

outstanding shares of the Debtor in open market transactions. Mr. Shkreli was appointed Chief

Executive Officer and Chairman of the Board.

7. In a filing with the U.S. Securities and Exchange Commission (the “SEC”) on

December 9, 2015, the Debtor announced that it had entered a Securities Purchase Agreement

with certain investors (the “PIPE Investors”) for the purchase and sale of the Debtor’s common

stock in a private placement in public equity transaction (the “PIPE Transaction”).

8. In a filing with the SEC on December 16, 2015, the Debtor announced that the

PIPE Transaction had been consummated. The PIPE Plaintiffs dispute that the PIPE Transaction

was consummated.

9. On December 17, 2015, Mr. Shkreli was arrested following a federal indictment,

charging him with multiple counts of securities fraud, securities fraud conspiracy, and wire fraud


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conspiracy. According the U.S. Department of Justice’s press release announcing the

indictment, the indictment relates to Mr. Shkreli’s tenure as CEO of Retrophin, Inc., a

biopharmaceutical company that trades under the ticker symbol RTRX, and as founder and

managing member of hedge funds MSMB Capital Management LP (MSMB Capital) and MSMB

Healthcare Management LP (MSMB Healthcare).

10. Mr. Shkreli was terminated as CEO of the Debtor and resigned from the Board of

Directors on December 17, 2015, after serving in those capacities for less than one month.

11. In addition, on December 17, 2015, Tony Chase resigned from the Board of

Directors. Also, in a filing with the SEC on December 23, 2015, the Debtor announced that its

independent registered public accounting firm, Marcum LLP, resigned, and its Interim Chief

Financial Officer, Christopher Thorn, submitted his resignation. On December 28, 2015, the

Debtor announced that Tom Fernandez and Marek Biestek resigned as members of the Board of

Directors of the Debtor on December 27, 2015.

12. On December 17, 2015, NASDAQ halted trading in the Debtor’s stock. As of the

date hereof, trading on NASDAQ has not resumed. On December 18, 2015, the Debtor received

a letter from NASDAQ indicating that NASDAQ intended to delist the Debtor’s securities under

its discretionary authority. NASDAQ cited a number of reasons for its decision, including,

among other things, the recent criminal indictment and arrest of Mr. Shkreli.

13. As a result of these events and other challenges facing the Debtor, the Debtor

sought chapter 11 protection on December 29, 2015.

The PIPE Litigation

14. On January 7, 2016, Gregory Rea, RTAT LLC, Edward H. Painter, Nancy

Retzlaff, and Armistice Capital Master Fund, Ltd. (the “Original PIPE Plaintiffs”) filed an


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adversary complaint (A.D.I. 1; Adv. Case No. 16-50001) against the Debtor. The Complaint was

amended (the “Amended Complaint”) on January 29, 2016 (A.D.I. 15) to add two additional

plaintiffs: Andrew Pizzo and Sabine Gritti (together with the Original PIPE Plaintiffs, the “PIPE

Plaintiffs”).2 In the Amended Complaint, the PIPE Plaintiffs seek, among other things, a

declaration that the Debtor holds in a resulting or constructive trust for the benefit of the PIPE

Plaintiffs the approximately $6,899,946.86 (the “Funds”) that the PIPE Plaintiffs paid to the

Debtor in the PIPE Transaction.

15. On January 7, 2016, the PIPE Plaintiffs also filed the Emergency Motion of

Gregory Rea, RTAT LLC, Edward H. Painter, Nancy Retzlaff, and Armistice Capital Master

Fund, Ltd. to (I) Escrow Certain Funds; or Alternatively, (II) Expedite the Adversary Proceeding

(D.I. 13) (the “Escrow Motion”), seeking to prevent the Debtor from using the Funds pending the

outcome of the PIPE Litigation. As alternative relief, the PIPE Plaintiffs requested that the Court

expedite the PIPE Litigation.

16. The PIPE Plaintiffs requested expedited consideration of the Escrow Motion (D.I.

14), which the Court granted by order entered on January 7, 2016 (D.I. 15), thereby setting a

hearing on the Escrow Motion for January 12.

17. At the hearing on January 12, 2016, the Debtor and the PIPE Plaintiffs negotiated

and agreed (among other things) that, in accordance with the Debtor’s obligations under section

363 of the Bankruptcy Code, the Debtor would not expend estate funds outside of the ordinary

course of business without seeking Court approval. With this and other assurances, the PIPE

Plaintiffs withdrew the Escrow Motion without prejudice.

2 For ease of reading, the Debtor refers to all of the plaintiffs as the PIPE Plaintiffs, regardless of

when they joined the PIPE Litigation.


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18. On February 1, 2016, the Debtor filed a motion to dismiss the Amended

Complaint (A.D.I. 18) (the “Motion to Dismiss”).

19. On March 22, 2016, the PIPE Plaintiffs filed their answering brief (A.D.I. 27).

20. On March 29, 2016, the Debtor filed its reply brief (A.D.I. 29) in support of the

Motion to Dismiss.

21. On April 1, 2016, the PIPE Plaintiffs filed a motion for leave (A.D.I 34) (the

“Motion for Leave”) to file a further amended complaint (the “Second Amended Complaint”).

22. The Debtor filed its opposition to the Motion for Leave on April 15, 2016 (A.D.I.

46).

23. The Court has scheduled a hearing on the Motion for Leave for May 6, 2016.

24. The Court has scheduled oral argument on the Motion to Dismiss for May 24,

2016.

The Bar Date and the PIPE Plaintiffs’ Proofs of Claim

25. On February 16, 2016, the Court entered the Order Granting Debtor’s Motion for

an Order (I) Establishing Bar Dates for Filing Proofs of Claim, (II) Approving the Form and

Manner of Notice Thereof and (III) Granting Related Relief (D.I. 186) (the “Bar Date Order”),

which, among other things, established April 1, 2016,3 as the general bar date (the “General Bar

Date”) by which creditors must file proofs of claim for pre-Petition Date claims.

26. After the entry of the Bar Date Order, the Debtor served notice of the General Bar

Date (D.I. 219) and appropriate claim forms pursuant to the Bar Date Order. The Debtor also

3 The Bar Date Order set the General Bar Date as thirty days after the Service Date (as defined in

the Bar Date Order). The Service Date occurred on March 1, 2016 and the General Bar Date is therefore April 1, 2016.


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published notice of the General Bar Date in the San Francisco Chronicle and the National

Edition of The Wall Street Journal.

27. The PIPE Plaintiffs each timely filed by the General Bar Date proofs of claim.

No other PIPE Investor timely filed a proof of claim related to the PIPE Transaction.

The Savant Transaction

28. Prior to the Petition Date, the Debtor entered into a non-binding letter of intent

with Savant Neglected Diseases, LLC (“Savant”), for the acquisition of the worldwide rights to

Savant’s benznidazole program for the treatment of Chagas Disease (the “Savant Transaction”).

Following the Petition Date, the Debtor continued to negotiate with Savant to reach the terms of

a binding letter of intent. As a result of these negotiations, the Debtor achieved a binding letter

of intent (the “Letter of Intent”) with Savant, subject to Bankruptcy Court approval.

29. On February 23, 2016, the Debtor filed a motion seeking (i) authorization to

execute and enter into the Letter of Intent with Savant, (ii) authorization to make certain

payments in connection the Letter of Intent and perform other obligations thereunder, and (iii)

granting related relief (D.I. 197). The Court entered an order authorizing the Debtor to execute

and enter into Letter of Intent on February 26, 2016 (D.I. 211), and on February 29, 2016, the

Debtor and Savant executed the Letter of Intent.

30. Closing the transactions contemplated by the Letter of Intent with Savant is

subject to, among other things, (i) obtaining financing in an amount adequate to permit the

Debtor to exit chapter 11 with at least $10 million in unencumbered cash and (ii) exiting chapter

11 by June 30, 2016.


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The DIP Financing and Exit Financing

31. On March 23, 2016, the Bankruptcy Court entered an order (D.I. 293) approving,

among other things, the Debtor’s entry into that certain amended letter of intent and annexed

amended term sheet, each dated March 18, 2016 (collectively, the “Stalking Horse LOI”), by and

between the Debtor and Cheval Holdings, Ltd., Black Horse Capital LP, Black Horse Capital

Master Fund Ltd., and Nomis Bay LTD (collectively, the “Stalking Horse”).

32. The Stalking Horse LOI provides for a debtor-in-possession financing facility of

$3 million (the “DIP Facility”) to operate its business until confirmation of a chapter 11 plan and

an exit facility of $11 million (the “Exit Facility”) to facilitate consummation of the Savant

Transaction as well as consummation of the plan. The Exit Facility of $11 million is conditioned

upon, among other things, closing of the Savant Transaction and exiting chapter 11 before the

end of June 2016. Both the DIP Facility and the Exit Facility are contemplated to convert to

shares of the Debtor’s common stock upon the effective date of a chapter 11 plan, subject to

certain terms and conditions.

33. On April 8, 2016, the Debtor filed a motion to approve the DIP Facility (D.I. 324)

(the “DIP Motion”).

34. On April 15, 2016, the PIPE Plaintiffs filed a preliminary objection (D.I. 337) to

the DIP Motion. The PIPE Plaintiffs also served discovery on the Debtor in the form of

interrogatories, document requests and deposition notices. In addition, the PIPE Plaintiffs served

document and deposition subpoenas on the Stalking Horse.4

4 In addition to the PIPE Litigation and the DIP Motion, the Parties have previously engaged in

litigation concerning, among other things, the Debtor’s employee bonus program and fee applications filed by the Debtor’s professionals. Among the arguments asserted by the PIPE Plaintiffs in their opposition to such relief is their claim that the Funds are held in trust for their benefit.


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35. On April 29, 2016, the Court entered an order approving the DIP Facility (D.I.

388).

The Plan and Disclosure Statement

36. On April 7, 2016, the Debtor filed its proposed chapter 11 plan of reorganization

(D.I. 318) (as may be amended, modified or supplemented, the “Plan”)5 and related proposed

disclosure statement (as may be amended, modified or supplemented, the “Disclosure

Statement”).

37. On April 15, 2016, the Debtor filed a motion to approve, among other things, the

Disclosure Statement, solicitation procedures for the Plan, and the Plan’s classification of claims

and interests (D.I. 343) (the “Solicitation Procedures Motion”).

38. A hearing to consider approval of the Disclosure Statement and the Solicitation

Procedures Motion is scheduled for May 6, 2016. Objections to approval of the Disclosure

Statement or the Solicitation Procedures Motion are due on April 29, 2016 (extended for the

PIPE Plaintiffs through Tuesday, May 3, 2016).

39. Through the Solicitation Procedures Motion, the Debtor has requested that the

Court schedule a confirmation hearing commencing on June 14, 2016, and set related dates and

deadlines.

40. The Debtor believes that the confirmation schedule proposed in the Solicitation

Procedures Motion will enable it to pursue confirmation of the Plan in accordance with the

timeframes required by the Savant Transaction, the DIP Financing and the Exit Financing.

5 Capitalized terms not otherwise defined herein are defined in the Plan.


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Mediation and Settlement Negotiations

41. Notwithstanding the Parties’ considerable disputes in this case, the Parties have

been engaged in settlement discussions since February 2016. Beginning in March 2016, the

Parties were aided in their settlement discussions through formal mediation conducted by the

Honorable Kevin J. Carey, United States Bankruptcy Judge for the District of Delaware.

Although the Parties’ initial mediation conference on March 14, 2016, was unsuccessful, the

Parties continued to engage in settlement negotiations throughout March and April 2016, aided

substantially by the continued mediation assistance of Judge Carey.

42. Through these extensive settlement negotiations, and with Judge Carey’s

continued assistance, the Parties were able to reach mutually agreeable terms to resolve the PIPE

Litigation and their other disputes.

The Settlement Stipulation

43. The Stipulation reflects the Parties’ settlement. The key terms of the Stipulation

are as follows:6

(a) The PIPE Plaintiffs will each retain their original 277,608 aggregate PIPE

Transaction shares of common stock (the “PIPE Transaction Shares”). Such PIPE Transaction

Shares shall be eligible for resale by the initial holder 180 days after the Effective Date of the

Plan provided that (i) such PIPE Transaction Shares are covered by an effective registration

statement filed with the SEC (which shall be filed by the Reorganized Debtor at the Reorganized

Debtor’s cost) or (ii) eligible for resale pursuant to an exemption from registration under the

Securities Act

6 The summary of the Stipulation described in this Motion is qualified in its entirety by the terms of

the Stipulation. In the event of any inconsistency, the Stipulation controls.


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(b) Pursuant to and in accordance with the Plan, on account of, in exchange

for, and in full settlement and satisfaction of all PIPE Claims, the PIPE Plaintiffs will receive:

(i) the following number of shares of common stock of the Debtor as

reorganized pursuant to the confirmed and effective Plan (the “Reorganized Debtor”):

PIPE Plaintiffs Plan Distribution Gregory Rea 120,700.00 Armistice Capital Master Fund, Ltd 60,350.00 Sabine Gritti 40,233.00 RTAT LLC 26,151.00 Andrew Pizzo 20,116.00 Edward Painter 5,029.00 Nancy Retzlaff 5,029.00

TOTALS 277,608.00

Such shares will be issued pursuant to the Plan and section 1145 of the Bankruptcy Code on the

Effective Date of the Plan (or as soon thereafter as is reasonably practicable) and will not be

“restricted securities” as that term is used in Rule 144 under the Securities Act of 1933 (the

“Securities Act”) and therefore may immediately thereafter be resold by non-affiliates without

regard for the restrictions imposed by Rule 144;

(ii) an additional 50,000 shares of common stock of the Reorganized

Debtor to be allocated among the PIPE Plaintiffs as agreed among the PIPE Plaintiffs, which will

not be “restricted securities” as that term is used in Rule 144 under the Securities Act and

therefore may be resold by non-affiliates without regard for the limitations imposed by Rule 144,

provided that such shares may not be resold until after 180 days following the Effective Date of

the Plan;

(iii) cash on the Effective Date of the Plan (or as soon as reasonably

practicable thereafter) in the amount of $250,000; and


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(iv) fifty percent (50%) of the proceeds, net of any and all expenses,

costs and fees in any way related to the investigation, prosecution or settlement of a lawsuit

against Kaye Scholer LLP (“Former Counsel”), of the first $2 million of any recovery by the

Debtor or the Reorganized Debtor (or any successor thereof) against Former Counsel on account

of any claim or cause of action held by the Debtor, the Debtor’s estate or the Reorganized Debtor

arising out of or related to the PIPE Transaction (the “Former Counsel Claims”). For the

avoidance of doubt, the Parties agree that neither the Debtor or the Reorganized Debtor shall

have any obligation to pursue the Former Counsel Claim if, despite their commercially

reasonable efforts (including the consideration of litigation counsel that may be suggested by the

Settling PIPE Plaintiffs) to identify litigation counsel reasonably acceptable to the Debtor or

Reorganized Debtor, as applicable, the Debtor or Reorganized Debtor has been unable to engage

such litigation counsel pursuant to a contingent fee arrangement and terms and conditions that,

individually and in the aggregate, are reasonably acceptable to the Debtor or the Reorganized

Debtor, as applicable, within one hundred eighty (180) days following the Effective Date.

(c) Additionally, the Stipulation provides that nothing in the Plan shall waive,

release or enjoin any of the PIPE Plaintiffs from pursuing any direct claims or causes of action

(collectively, the “Chardan Direct Claims”) the PIPE Plaintiffs may have against Chardan

Capital Markets, LLC (“Chardan”), arising from or relating in any way to the PIPE Transaction.

Notwithstanding the foregoing, the PIPE Plaintiffs agree that, if Chardan asserts a claim or cause

of action against the Debtor or the Reorganized Debtor as a result of the PIPE Plaintiffs asserting

such Chardan Direct Claims against Chardan, then the PIPE Plaintiffs shall immediately stay

their efforts to pursue or otherwise recover upon the Chardan Direct Claims so as to permit the

Reorganized Debtor to seek to enforce the discharge injunction under the Plan or otherwise


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enjoin Chardan from asserting a claim or cause of action against the Debtor or the Reorganized

Debtor. The PIPE Plaintiffs may resume prosecution of the Chardan Direct Claims only upon

entry of a Final Order enjoining Chardan from asserting claims or causes of action against the

Debtor and the Reorganized Debtor. In the event that Chardan is not enjoined from asserting

claims or causes of action against the Debtor and the Reorganized Debtor, the PIPE Plaintiffs

shall be barred from pursuing the Chardan Direct Claims.

44. In addition, the Stipulation provides that unless the Bankruptcy Court has entered

an order denying approval of the Stipulation or the Bankruptcy Court has adjudicated the Debtor

to be in material breach of its obligations pursuant to the Stipulation, subject to the terms and

conditions of the Stipulation, each of the Settling PIPE Plaintiffs agrees that he, she or it shall:

(a) Not vote to reject the Plan so long as the Plan is consistent in all material

respects with the Stipulation; and

(b) Support the Plan and not (i) withdraw or revoke its vote with respect to the

Plan, (ii) object to the Plan or any related disclosure statement, so long as each of the foregoing

is consistent in all material respects with the Stipulation and (iii) support any alternative plan or

transaction which the Debtor does not support.

45. The Stipulation also provides customary additional terms, including agreement to

and consent to be bound by the PIPE Settlement Releases (as defined in the Plan) and dismissal

with prejudice of the Amended Complaint as set forth therein.

46. The Stipulation is subject to Court approval and the Effective Date of the Plan as

set forth therein.


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RELIEF REQUESTED

47. By this Motion, the Debtor requests that the Court enter the Proposed Order

approving the Stipulation pursuant to section 105(a), 363 and 502 of the Bankruptcy Code and

Bankruptcy Rule 9019.

BASIS FOR RELIEF

48. Bankruptcy Rule 9019 governs approval of settlements by a debtor and provides

that, “on motion by the trustee and after notice and a hearing, the court may approve a

compromise or settlement.” Fed. R. Bankr. P. 9019. In addition, section 105(a) of the

Bankruptcy Code provides that the “court may issue any order, process or judgment that is

necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a).

49. The starting point in analyzing any proposed settlement is the general policy of

encouraging settlements and favoring compromises. See Myers v. Martin (In re Martin), 91 F.3d

389, 393 (3d Cir. 1996) (“Compromises are favored in bankruptcy.”); In re World Health

Alternatives, Inc., 344 B.R. 291, 296 (Bankr. D. Del. 2006) (finding settlements “generally

favored in bankruptcy”). The Third Circuit has recognized that “[i]n administering

reorganization proceedings in an economical and practical manner it will often be wise to

arrange the settlement of claims as to which there are substantial and reasonable doubts.” In re

Penn Cent. Transp. Co., 596 F.2d 1102, 1113 (3d Cir. 1979) (internal quotation marks omitted)

(quoting Protective Comm. for Indep. S’holders of TMT Trailer Ferry, Inc. v. Anderson, 390

U.S. 414, 424 (1968)).

50. To approve a settlement, a bankruptcy court must determine that such settlement

is in the best interest of a debtor’s estate. Law Debenture Trust Co. of New York v. Kaiser


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Aluminum Corp. (In re Kaiser Aluminum Corp.), 339 B.R. 91, 95–96 (D. Del. 2006). In

addition, a court must:

assess and balance the value of the claim that is being compromised against the value to the estate of the acceptance of the compromise proposal in light of four factors: (1) the probability of success in the litigation, (2) the likely difficulties in collection, (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it, and (4) the paramount interests of the creditors.

Id. at 96 (quoting Martin, 91 F.3d at 393). The court’s ultimate inquiry is whether a settlement is

fair, reasonable, and in the best interest of a debtor’s estate. In re Marvel Entm’t Grp., Inc., 222

B.R. 243, 249 (D. Del. 1998) (quoting In re Louise’s, Inc., 211 B.R. 798, 801 (D. Del. 1997)).

51. The decision whether to approve a proposed compromise and settlement is

committed to the sound discretion of the bankruptcy court. See, e.g., In re Coram Healthcare

Corp., 315 B.R. 321, 329 (Bankr. D. Del. 2004). A court need not decide the numerous issues of

law and fact raised by the settlement and it need not be convinced that the proposed settlement is

the best possible, rather “[t]he court need only conclude that the settlement falls within the

reasonable range of litigation possibilities somewhere above the lowest point in the range of

reasonableness.” In re Nutritional Sourcing Corp., 398 B.R. 816, 833 (Bankr. D. Del. 2008)

(quoting In re Coram Healthcare Corp., 315 B.R. 321, 330 (Bankr. D. Del. 2004)).

52. In the Debtor’s business judgment, the resolution of the many disputed issues

between the Debtor and the Settling PIPE Plaintiffs embodied in the Stipulation is reasonable

and in the best interest of the Debtor’s estate, creditors, shareholders and other parties in interest.

The Stipulation is the product of extensive and lengthy discussions and negotiations between the

Settling PIPE Plaintiffs and the Debtor, including a formal mediation process before Judge


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Carey. The Stipulation provides a resolution of the PIPE Litigation, the PIPE Plaintiffs’ claims

and related issues that falls well within the range of reasonable litigation outcomes.

53. Importantly, the Stipulation also provides a fair and practical resolution of

disputes that will facilitate the ongoing efforts to approve the Disclosure Statement and confirm

the Debtor’s Plan in a timely and efficient manner and consistent with the requirements the

Savant Transaction, the DIP Financing and the Exit Financing.

54. Moreover, as discussed below, the relevant Martin factors weigh in favor of

approving the Stipulation.7

A. The Probability of Success in Litigation

55. The Debtor believes it has strong defenses to the claims asserted by the PIPE

Plaintiffs, and further believes that such claims, to the extent allowed, would be subordinated

pursuant to section 510(b) of the Bankruptcy Code. The PIPE Plaintiffs, however, vigorously

dispute the applicability of section 510(b) of the Bankruptcy Code to their claims, and contend

that the PIPE Transaction failed to close and that the Funds are held in trust for them. The Court

has not yet issued any ruling on these important issues, and the ultimate outcome of the issues is

uncertain.

56. In addition, even if the claims are subordinated to the level of common stock

pursuant to section 510(b) of the Bankruptcy Code, the Parties’ disputes would not end. The

Debtor believes, and its proposed Plan contemplates, that the Debtor is solvent and existing

common stock will retain their interests. As a result, even claims subordinated to the level of

common stock may be entitled a distribution. Therefore, the Parties would still need to litigate,

at a minimum, the appropriate amount of damages. In addition, the Parties would potentially

7 Given the nature of the Parties’ disputes, the “the likely difficulties in collection” factor is not

relevant and is therefore not addressed in this Motion.


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have to litigate the allocation of shares of common stock on account of any such damages. The

ultimate outcome of such proceedings is uncertain. See, e.g., In re Orange Cty. Nursery, Inc.,

2013 WL 3776320, at *6–8 (Bankr. C.D. Cal. July 17, 2013), rev’d on other grounds, 523 B.R.

692 (C.D. Cal. 2014).

57. Put simply, even if the Debtor were successful in subordinating the PIPE

Plaintiffs’ claims, the Debtor still might have faced lengthy, complex litigation with the PIPE

Plaintiffs over the allowance, amount, and allocation of stock on account of their claims. The

Stipulation avoids the burden, expense and uncertainty of such litigation.

B. The Complexity of the Litigation Involved, and the Expense, Inconvenience and Delay Necessarily Attending It

58. As described in detail above, the Debtor is facing lengthy litigation involving

complex issues with an uncertain outcome, therefore, this factor strongly militates in favor of

approving the Stipulation.

C. The Paramount Interest of Holders of Claims and Interests

59. The interests of creditors, interest holders and other stakeholders is best served by

approving the Stipulation. Absent approval of the Stipulation, the PIPE Plaintiffs will continue

to assert that the Funds—which represent nearly all of the Debtor’s currently available cash—are

not property of the Debtor’s estate. Although, as discussed above, the Debtor believes it would

ultimately prevail on this issue, the damage to the Debtor’s estate, creditors, and other

stakeholders if the Debtor does not prevail is potentially devastating and could put in serious

jeopardy the ability of general unsecured creditors and equity security holders to recover any

meaningful distribution on their claims. With the Stipulation in hand, the Debtor will be in a

much better position to pursue confirmation of the Plan, which contemplates that general

unsecured creditors will be paid in full over time, with interest, and existing equity security


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holders will retain its interests. Accordingly, there can be no doubt that approving the

Stipulation is in the best interests of creditors.

CONCLUSION

60. Approving the Stipulation will greatly benefit the Debtor’s estate and bolster its

efforts to successfully reorganize on the timeframe required by the Savant Transaction, the DIP

Financing and the Exit Financing. Moreover, there can be no doubt that the Stipulation falls well

within the range of reasonable litigation outcomes faced by the Parties. The Stipulation is the

product of extensive, arm’s-length negotiations, including before Judge Carey as mediator. It

provides for a fair and practical resolution of the PIPE Litigation, the PIPE Plaintiffs’ claims and

related disputes between the Debtor and the Settling PIPE Plaintiffs. If approved, the Stipulation

will facilitate confirmation of the Debtor’s Plan, which provides that that general unsecured

creditors will be paid in full over time and existing equity will retain their interests.

61. For these reasons, the Court should find that the Stipulation (i) is fair, equitable

and in the best interests of the Debtor, its estate, creditors, stockholders, and other parties in

interest; (ii) represents an exercise of the Debtor’s sound business judgment; and (iii) should be

approved pursuant to sections 105(a), 363 and 502 of the Bankruptcy Code and Bankruptcy Rule

9019.

NOTICE

62. Copies of this Motion have been served by email, hand delivery, facsimile, and/or

overnight delivery upon the following: (a) the Office of the United States Trustee for the District

of Delaware; (b) counsel to the PIPE Plaintiffs; (c) counsel to the named plaintiffs in the class

action litigation; (d) counsel to Martin Shkreli; (e) the PIPE Investors; (f) the SEC; (g) Kaye

Scholer LLP; (h) Chardan Capital Markets, LLC and its known counsel; (i) current and prior


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insurers providing directors and officers liability insurance to the Debtor; (j) the parties included

on the Debtor’s list of twenty (20) largest unsecured creditors; and (k) all parties who have

requested notice under Bankruptcy Rule 2002. The Debtor submits that, under the

circumstances, no other or further notice is required.

WHEREFORE, the Debtor respectfully requests that the Court (i) grant this Motion and

the relief requested herein; (ii) enter the Proposed Order attached as Exhibit A hereto approving

the Stipulation attached to the Proposed Order as Exhibit 1; and (iii) grant such other and further

relief as it deems just and proper.

Dated: May 2, 2016 MORRIS, NICHOLS, ARSHT & TUNNELL LLP Wilmington, Delaware /s/ Marcy J. McLaughlin

Eric D. Schwartz (No. 3134) Gregory W. Werkheiser (No. 3553) Matthew B. Harvey (No. 5186) Marcy J. McLaughlin (No. 6184) 1201 N. Market St., 16th Floor PO Box 1347 Wilmington, DE 19899-1347 Telephone: (302) 658-9200 Facsimile: (302) 658-3989 E-mail:[email protected] [email protected]

[email protected] [email protected]

- and - Peter Ivanick, Esq. (admitted pro hac vice)


20

Pieter Van Tol, Esq. (admitted pro hac vice) John D. Beck, Esq. (admitted pro hac vice) HOGAN LOVELLS US LLP 875 Third Avenue New York, NY 10022 Telephone: (212) 918-3000 Facsimile: (212) 918-3100 E-mail:[email protected] [email protected] [email protected] Counsel to the Debtor and Debtor in Possession

10005579



In re Chapter 11 KaloBios Pharmaceuticals, Inc., Case No. 15-12628 (LSS) Debtor.1

Requested Objection Deadline: May 5, 2016, at 12:00 p.m. (ET) Requested Hearing Date: May 6, 2016, at 9:30 a.m. (ET)

NOTICE OF DEBTOR’S MOTION PURSUANT TO 11 U.S.C. § 105(a), 363 AND 502

AND FED. R. BANKR. P. 9019 APPROVING SETTLEMENT STIPULATION BY AND BETWEEN (I) THE DEBTOR AND (II) THE SETTLING PIPE PLAINTIFFS

PLEASE TAKE NOTICE that on May 2, 2016, the above-captioned debtor and debtor in possession (the “Debtor”) filed the Debtor’s Motion Pursuant To 11 U.S.C. § 105(a), 363 And 502 And Fed. R. Bankr. P. 9019 Approving Settlement Stipulation By And Between (I) The Debtor And (II) The Settling Pipe Plaintiffs (the “Motion”).

PLEASE TAKE FURTHER NOTICE THE DEBTOR HAS REQUESTED THAT A HEARING ON THE MOTION BE HELD ON MAY 6, 2016, AT 9:30 A.M. (ET) (THE “HEARING”) BEFORE THE HONORABLE LAURIE SELBER SILVERSTEIN, AT THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE, 824 N. MARKET STREET, 6TH FLOOR, COURTROOM #2, WILMINGTON, DELAWARE 19801.

PLEASE TAKE FURTHER NOTICE that the Debtor has requested that the Court require any party wishing to oppose the Motion to file a response or objection on or before May 5, 2016, at 12:00 p.m. (ET) (the “Objection Deadline”). Objections or responses, if any, to the Motion must be (a) in writing; (b) filed with the Clerk of the Bankruptcy Court, 824 N. Market Street, 3rd Floor, Wilmington, Delaware 19801, on or before the Objection Deadline set by the Court; and (c) served on the undersigned counsel as to be received on or before the Objection Deadline set by the Court.

IF YOU FAIL TO RESPOND IN ACCORDANCE WITH THIS NOTICE, THE

COURT MAY GRANT THE RELIEF REQUESTED IN THE MOTION WITHOUT FURTHER NOTICE OR HEARING.



Case 15-12628-LSS Doc 389-1 Filed 05/02/16 Page 1 of 2

2

Dated: May 2, 2016 MORRIS, NICHOLS, ARSHT & TUNNELL LLP Wilmington, Delaware

/s/ Marcy J. McLaughlin Eric D. Schwartz (No. 3134) Gregory W. Werkheiser (No. 3553) Matthew B. Harvey (No. 5186) Marcy J. McLaughlin (No. 6184) 1201 N. Market St., 16th Floor PO Box 1347 Wilmington, DE 19899-1347 Telephone: (302) 658-9200 Facsimile: (302) 658-3989 Email: [email protected] [email protected]

[email protected] [email protected] and Peter Ivanick, Esq. Lynn W. Holbert, Esq. John D. Beck, Esq. HOGAN LOVELLS US LLP 875 Third Avenue New York, NY 10022 Telephone: (212) 918-3000 Facsimile: (212) 918-3100 Email: [email protected] [email protected] [email protected]

Counsel for Debtor and Debtor in Possession


Exhibit A

Proposed Order




Re: D.I. ______ GREGORY REA, RTAT LLC, EDWARD H. PAINTER, NANCY RETZLAFF, ARMISTICE CAPITAL MASTER FUND, LTD, ANDREW PIZZO, AND SABINE GRITTI,

Plaintiffs,


Defendant.

Adv. Case No. 16-50001 (LSS) Re: A.D.I. ______

ORDER PURSUANT TO 11 U.S.C. § 105(a), 363 AND 502 AND FED. R. BANKR. P. 9019 APPROVING SETTLEMENT STIPULATION BY AND BETWEEN (I) THE DEBTOR AND (II) SETTLING PIPE PLAINTIFFS

Upon the motion (the “Motion”) of KaloBios Pharmaceuticals, Inc., as debtor and debtor in

possession (the “Debtor” or “KaloBios”), pursuant to sections 105(a), 363, and 502 of title 11 of

the United States Code (the “Bankruptcy Code”) and Rule 9019 of the Federal Rules of

Bankruptcy Procedure (the “Bankruptcy Rules”), for entry of an order approving the settlement

stipulation (the “Stipulation”) by and between (i) the Debtor and (ii) each PIPE Plaintiff (as

defined in the Motion) that has executed the Stipulation (the “Settling PIPE Plaintiffs,” and

together with the Debtor, the “Parties”) resolving, among other things, the above-captioned

adversary proceeding (the “PIPE Litigation”); and adequate notice of the Motion having been


address is 1000 Marina Blvd #250, Brisbane, CA 94005-1878 .


2

given as set forth in the Motion; and it appearing that no other or further notice is necessary; and

the Court having jurisdiction to consider the Motion and the relief requested therein pursuant to

28 U.S.C. §§ 157 and 1334; and the Court having determined that consideration of the Motion is

a core proceeding pursuant to 28 U.S.C. § 157(b)(2); and the Court having determined that the

Debtor has demonstrated sound business justifications for entering into the Stipulation and the

legal and factual bases set forth in the Motion establish just cause for the relief requested in the

Motion; and, taking into account the anticipated costs and risks associated with the PIPE Claims

and related disputes between the Parties, the Stipulation and the related relief requested by the

Motion is fair, reasonable and in the best interests of the Debtor, its estates, creditors,

stockholders, and other parties in interest; and upon the record in this case and the PIPE

Litigation; and after due deliberation;

FOUND AND CONCLUDED THAT:

A. This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and

1334.

B. The PIPE Plaintiffs represent a subset of the PIPE Investors who entered into the

PIPE Transaction Documents in December 2015 to acquire common stock of the Debtor.

C. Pursuant to the Bar Date Order, proofs of claims on account of prepetition claims,

including any and all claims arising out of or related to the PIPE Transaction were required to be

filed by April 1, 2016.

D. Each of the PIPE Plaintiffs timely filed a proof of claim.

E. No other PIPE Investor apart from the PIPE Plaintiffs has participated in the PIPE

Litigation, filed a proof of claim related to the PIPE Transaction, or otherwise asserted a claim in

the Debtor’s chapter 11 case arising out of or related to the PIPE Transaction. By virtue of their


3

prosecution of the PIPE Litigation and other active participation in the Debtor’s chapter 11 case,

the PIPE Plaintiffs have incurred expenses not shared by the other PIPE Investors.

F. The circumstances of each PIPE Plaintiff or other PIPE Investor’s participation in

the PIPE Transaction were unique. Nothing in this Order or the Stipulation is intended or shall

be construed as a finding by the Court or an admission by the Debtor that any other PIPE

Investor that is not a Settling PIPE Plaintiff holds any particular claims against or interests in

Debtor. The Stipulation and this Order are without prejudice to any claims or causes of action

that the Debtor or any successor thereto has against any PIPE Investor that is not a Settling PIPE

Plaintiff.

G. In order to avoid the cost and risk inherent in any litigation, after arm’s-length

negotiations, the Parties agreed to compromise, settle and release fully and finally the PIPE

Claims for the mutual promises and undertakings set forth in the Stipulation and for other good

and valuable consideration, the receipt and sufficiency of which are acknowledged by the

Parties.

IT IS HEREBY ORDERED THAT:

1. The Motion is GRANTED.

2. The Stipulation annexed to this Order as Exhibit 1 and the Debtor’s entry into the

Stipulation are APPROVED.

3. The Debtor is authorized to take any and all actions that may be reasonably

necessary or appropriate to perform its obligations and enforce its rights arising under the

Stipulation.


4

4. The failure specifically to describe or include any particular provision of the

Stipulation in this Order shall not diminish or impair the effectiveness of such a provision, it

being the intent of this Court that the Stipulation be approved in its entirety.

5. The Stipulation and this Order shall be binding upon the Debtor, the Settling PIPE

Plaintiffs and all parties in interest in this chapter 11 case, and any of their respective successors

and assigns, including without limitation the Reorganized Debtor and any transferees, purchasers

or other acquirers of the claims or interests of the Settling PIPE Plaintiffs in this chapter 11 case.

6. Only the PIPE Plaintiffs shall be entitled to the distributions and treatment

provided for in the Stipulation, and no other PIPE Investor shall be entitled to such treatment,

provided, however, that nothing in the Stipulation or this Order shall affect or impair the interests

of any PIPE Investor in the common stock of the Debtor such PIPE Investor acquired pursuant to

the PIPE Transaction.

7. The Debtor, the Debtor’s claims and solicitation agent, Prime Clerk LLC, and the

Clerk of the Court are authorized to take all necessary and appropriate actions to give effect to

the Stipulation.

8. The Court retains jurisdiction with respect to all matters arising from or related to

the implementation of this Order and the settlement embodied in the Stipulation.

Dated: _______________, 2016 Wilmington, Delaware

______________________________________________ THE HONORABLE LAURIE SELBER SILVERSTEIN UNITED STATES BANKRUPTCY JUDGE


Exhibit 1 to Proposed Order

Stipulation




GREGORY REA, RTAT LLC, EDWARD H. PAINTER, NANCY RETZLAFF, ARMISTICE CAPITAL MASTER FUND, LTD, ANDREW PIZZO, AND SABINE GRITTI,

Plaintiffs,


Defendant.

Adv. Case No. 16-50001 (LSS)

SETTLEMENT STIPULATION

This settlement stipulation (the “Stipulation”) is made and entered into this

____________ day of _________, 2016, by and between (i) KaloBios Pharmaceuticals, Inc., the

debtor and debtor in possession (the “Debtor” or “KaloBios”) in the above-captioned chapter 11

case and (ii) each PIPE Plaintiff (as defined herein) that has executed this Stipulation (the

“Settling PIPE Plaintiffs,” and together with the Debtor, the “Parties”). The Parties hereby

stipulate and agree as follows:

RECITALS

WHEREAS, in December 2015, certain investors, including the PIPE Plaintiffs, signed






4

WHEREAS, the Debtor disputes the allegations and claims of the PIPE Plaintiffs in the

PIPE Litigation and the PIPE POCs.

WHEREAS, the Other PIPE Investors have not joined in the PIPE Litigation.

WHEREAS, on April 7, 2016, the Debtor filed its proposed chapter 11 plan of

reorganization (D.I. 318) (as may be amended, modified or supplemented, the “Plan”) and

related proposed disclosure statement (D.I. 319) (as may be amended, modified or supplemented,

the “Disclosure Statement”).

WHEREAS, on April 8, 2016, the Debtor filed a motion to approve debtor-in-possession

financing (D.I. 324) (the “DIP Motion”).

WHEREAS, on April 15, 2016, the PIPE Plaintiffs filed a preliminary objection (D.I.

337) (the “DIP Objection”) to the DIP Motion and served related discovery.

WHEREAS, the PIPE Plaintiffs have objected to allowance and payment of the first

monthly fee applications of the Debtor’s counsel and financial advisor (D.I. 288 & 327) (the

“Fee Application Objections”).

NOW, THEREFORE, after arm’s-length negotiations and in consideration of the

foregoing, as well as the terms, conditions and mutual agreements set forth herein, IT IS

HEREBY AGREED by and between the Parties that the PIPE Litigation, PIPE POCs, all other

disputes relating to the PIPE Transaction and/or PIPE Transaction Documents, the DIP

Objection, the Fee Application Objections and all related matters (collectively, the “PIPE

Claims”) shall be compromised and settled as follows:

1. Recitals. The recitals set forth above are expressly incorporated herein and are

made an integral part of this Stipulation.


5

2. Stipulation is Conditional and Subject to Bankruptcy Court Approval and

Occurrence of the Effective Date of the Plan. This Stipulation is made for the sole purpose of

settling the PIPE Claims, and is subject to Bankruptcy Court approval. Except as otherwise

provided in paragraphs 3, 10, 12, 16, and 18 hereof, this Stipulation shall become effective and

enforceable when each of the following conditions (each a “PIPE Settlement Effectiveness

Condition” and collectively, the “PIPE Settlement Effectiveness Conditions”) has been satisfied

or waived in accordance with the terms of this Stipulation:

a. The Stipulation shall have been executed by the Debtor and at least six of

the seven PIPE Plaintiffs as Settling PIPE Plaintiffs, including Gregory

Rea and Armistice Capital Master Fund, Ltd. This PIPE Settlement

Effectiveness Condition may only be waived by the Debtor.

b. The Bankruptcy Court shall have entered an order approving the

Stipulation and such order has become a Final Order2 (the “Approval

Order”), which Approval Order shall provide, in a form satisfactory to the

Debtor, that the settlement and treatment of claims arising out of the PIPE

Transaction and PIPE Transaction Documents provided for herein and in

the Plan to the PIPE Plaintiffs is not, and need not be, offered or provided

2 For purposes of this Stipulation, “Final Order” means an order entered by the Bankruptcy Court,

or any other court exercising jurisdiction over the subject matter hereof and the Parties, that has not been stayed, reversed, modified, or vacated and as to which the time within which a notice of appeal, petition for writ of certiorari, or a motion for stay, rehearing, reargument, reconsideration, or other motion (collectively, a “Tolling Motion”) that tolls the running of the time period within which a notice of appeal, petition for writ of certiorari, or Tolling Motion must be filed has expired and: (i) there has not been filed any appeal or petition for writ of certiorari, or if any such appeal or petition has been filed, it is no longer pending; and (ii) there has not been filed any Tolling Motion, or if any such Tolling Motion has been filed, it was denied or the tolling period set forth therein has passed; provided, however, that the possibility that a motion pursuant to Fed. R. Civ. P. 60 or Fed. R. Bankr. 9024 may be filed with respect to such order does not prevent such order from being a Final Order.


6

to the Other PIPE Investors under the Plan or otherwise. This PIPE

Settlement Effectiveness Condition is only waivable by mutual agreement

of the Parties.

c. The Class of Claims under the Plan consisting of the Claims of the PIPE

Plaintiffs (currently designated as Class 4) shall have voted as a Class to

Accept the Plan.3 This PIPE Settlement Effectiveness Condition is only

waivable by the Debtor.

d. The Effective Date of the Plan shall have occurred, provided that the Plan,

as may be further amended, modified or supplemented is consistent in

material respects with this Stipulation. This PIPE Settlement

Effectiveness Condition is not waivable.

3. Effect of Failure of PIPE Settlement Effectiveness Conditions. If the foregoing

conditions in paragraphs 2.a through 2.d are not satisfied or waived as permitted by this

Stipulation prior to June 30, 2016 (or such later date as may be agreed by the Parties in writing),

then this Stipulation shall be null and void and the Parties shall return to their original positions

as if this Stipulation was never executed, and the Approval Order, if entered, shall be deemed

vacated, provided, however, that no other order of the Bankruptcy Court entered prior to the

Stipulation becoming null and avoid in accordance with this paragraph 3 shall be affected by the

Stipulation becoming null and void. In the event that this Stipulation becomes null and void

pursuant to this paragraph 3, then none of the terms or statements contained in this Stipulation, in

any papers filed in support of entry of the Approval Order, of counsel to either Party at any

hearing concerning the Approval Order or this Stipulation, or in any correspondence related to

3 Capitalized terms used in paragraph 2.c and not otherwise defined herein are defined in the Plan.



8

be resold by non-affiliates without regard for the limitations imposed by Rule 144, provided that

such shares may not be resold until after 180 days following the Effective Date of the Plan;

c. cash on the Effective Date of the Plan (or as soon as reasonably

practicable thereafter) in the amount of $250,000; and

d. fifty percent (50%) of the proceeds, net of any and all expenses, costs and

fees in any way related to the investigation, prosecution or settlement of a lawsuit against Kaye

Scholer LLP (“Former Counsel”), of the first $2 million of any recovery by the Debtor or the

Reorganized Debtor (or any successor thereof) against Former Counsel on account of any claim

or cause of action held by the Debtor, the Debtor’s estate or the Reorganized Debtor arising out

of or related to the PIPE Transaction (the “Former Counsel Claims”). For the avoidance of

doubt, the Parties agree that neither the Debtor or the Reorganized Debtor shall have any

obligation to pursue the Former Counsel Claim if, despite their commercially reasonable efforts

(including the consideration of litigation counsel that may be suggested by the Settling PIPE

Plaintiffs) to identify litigation counsel reasonably acceptable to the Debtor or Reorganized

Debtor, as applicable, the Debtor or Reorganized Debtor has been unable to engage such

litigation counsel pursuant to a contingent fee arrangement and terms and conditions that,

individually and in the aggregate, are reasonably acceptable to the Debtor or the Reorganized

Debtor, as applicable, within one hundred eighty (180) days following the Effective Date.

6. Allocation of Consideration. The allocation of the consideration provided in

paragraphs 5.b, 5.c and 5.d above among the PIPE Plaintiffs shall be determined by and among

the Settling PIPE Plaintiffs, and the sole obligation of the Reorganized Debtor shall be to tender

such consideration to or as directed by the undersigned counsel to the Settling PIPE Plaintiffs.

The Reorganized Debtor shall not have or incur any liability for delivering such consideration to


9

or as directed by the undersigned counsel to the Settling PIPE Plaintiffs. The validity and

enforceability of this Stipulation shall not in any way be affected by any dispute among the PIPE

Plaintiffs concerning such allocation.

7. Current Common Stock Holdings. Pursuant to and in accordance with the Plan,

the PIPE Plaintiffs will each retain on the Effective Date of the Plan their respective PIPE

Transaction Shares. For the avoidance of doubt, the Parties agree for purposes of this Stipulation

that PIPE Transaction Shares were issued to the PIPE Plaintiffs prior to the date hereof. Such

PIPE Transaction Shares shall be eligible for resale by the initial holder 180 days after the

Effective Date of the Plan provided that (i) such PIPE Transaction Shares are covered by an

effective registration statement filed with the SEC (which shall be filed by the Reorganized

Debtor at the Reorganized Debtor’s cost) or (ii) eligible for resale pursuant to an exemption from

registration under the Securities Act.

8. Preserved Claims. Nothing in the Plan shall waive, release or enjoin any of the

PIPE Plaintiffs from pursuing any direct claims or causes of action (collectively, the “Chardan

Direct Claims”) the PIPE Plaintiffs may have against Chardan Capital Markets, LLC

(“Chardan”), arising from or relating in any way to the PIPE Transaction. Notwithstanding the

foregoing, the PIPE Plaintiffs agree that, if Chardan asserts a claim or cause of action against the

Debtor or the Reorganized Debtor as a result of the PIPE Plaintiffs asserting such Chardan Direct

Claims against Chardan, then the PIPE Plaintiffs shall immediately stay their efforts to pursue or

otherwise recover upon the Chardan Direct Claims so as to permit the Reorganized Debtor to

seek to enforce the discharge injunction under the Plan or otherwise enjoin Chardan from

asserting a claim or cause of action against the Debtor or the Reorganized Debtor. The PIPE

Plaintiffs may resume prosecution of the Chardan Direct Claims only upon entry of a Final Order


10

enjoining Chardan from asserting claims or causes of action against the Debtor and the

Reorganized Debtor. In the event that Chardan is not enjoined from asserting claims or causes of

action against the Debtor and the Reorganized Debtor, the PIPE Plaintiffs shall be barred from

pursuing the Chardan Direct Claims.

9. Plan Support. Unless the Bankruptcy Court has entered an order denying

approval of this Stipulation or the Bankruptcy Court has adjudicated the Debtor to be in material

breach of its obligations pursuant to this Stipulation, subject to the terms and conditions of this

Stipulation, each of the Settling PIPE Plaintiffs agrees that he, she or it shall:

a. Not vote to reject the Plan so long as the Plan is consistent in all material

respects with this Stipulation; and

b. Support the Plan and not (i) withdraw or revoke its vote with respect to the

Plan, (ii) object to the Plan or any related disclosure statement, so long as each of the foregoing

is consistent in all material respects with this Stipulation and (iii) support any alternative plan or

transaction which the Debtor does not support.

10. Stay of the PIPE Litigation. The Parties hereby stipulate and agree that all dates

and deadlines in the PIPE Litigation will be stayed upon the later to occur of (i) the execution of

this Stipulation by counsel to the Parties and (ii) the Debtor’s filing of a motion pursuant to

Bankruptcy Rule 9019 to approve this Stipulation. Such stay shall continue through the earlier

of (i) entry of an order denying approval of the Stipulation or (ii) June 30, 2016 (or such later

date as may be agreed by the Parties in writing).

11. Dismissal of the PIPE Litigation with Prejudice. Upon the satisfaction or waiver

of the PIPE Settlement Effectiveness Conditions, the Amended Complaint and the PIPE


11

Litigation shall be deemed to be dismissed with prejudice and without further action of any

Party, except that the Debtor may file a notice of dismissal memorializing such dismissal.

12. Other Disputes. Notwithstanding anything to the contrary in this Stipulation, the

DIP Objection shall be deemed withdrawn immediately upon the later to occur of (i) the

execution of this Stipulation by counsel to the Parties and (ii) the Debtor’s filing of a motion

pursuant to Bankruptcy Rule 9019 to approve this Stipulation. Additionally, upon entry of the

Approval Order, the Fee Application Objections will be deemed withdrawn without prejudice to

the PIPE Plaintiffs’ rights to object to final approval of fees and expenses of professionals in the

Bankruptcy Case.

13. Conforming Plan Amendments. Following the execution of this Stipulation by

counsel to the Parties and delivery of their respective signatures, the Debtor shall amend the Plan

substantially as set forth on Exhibit A hereto (the “PIPE Settlement Plan Amendments”), which

PIPE Settlement Plan Amendments shall provide for, among other things, (i) treatment of the

PIPE Claims in the manner provided for in this Stipulation and (ii) the PIPE Settlement Releases

(as defined in the Plan). For the avoidance of doubt, the Debtor may further amend the Plan after

amending the Plan to incorporate the PIPE Settlement Plan Amendments so long as such further

amendments are not inconsistent with the PIPE Settlement Plan Amendments or this Stipulation.

14. Mutual Releases. Subject to the satisfaction or waiver as provided in this

Stipulation of the PIPE Settlement Effectiveness Conditions, the Parties agree to and consent to

be bound by the PIPE Settlement Releases (as defined in the Plan).

15. Nondisparagement. Each of the Settling PIPE Plaintiffs agrees that he, she or it

(a) will not make any voluntary statements to disparage or discredit the Debtor in any manner,

directly or indirectly, (b) will use commercially reasonable efforts to cause its employees and


12

agents not to make such statements and (c) will not cause a third party to make any such

statements. The Debtor agrees that it (a) will not make any voluntary statements to disparage or

discredit any of the Settling PIPE Plaintiffs in any manner, directly or indirectly, (b) will use

commercially reasonable efforts to cause its employees and agents not to make such statements

and (c) will not cause a third party to make any such statements.

16. Intent. The Parties (a) acknowledge that it is their intent to consummate this

Stipulation and (b) agree to cooperate to the extent reasonably necessary to obtain Bankruptcy

Court approval and implement all terms and conditions of the Stipulation and to exercise their

best efforts to accomplish the terms and conditions of the Stipulation.

17. Complete Defense. This Stipulation may be plead as a full and complete defense

to, and may be used as the basis for an injunction against, any action, suit or other proceeding

that may be instituted, prosecuted or attempted in breach of or contrary to this Stipulation.

18. No Admission. Neither the Stipulation, nor any act performed or document

executed pursuant to, or in furtherance of, the Stipulation: (a) is or may be deemed to be or may

be used as an admission of, or evidence of, the validity of any PIPE Claim, or of any

wrongdoing or liability of any person or entity; or (b) is or may be deemed to be or may be

used as an admission of, or evidence of, any fault or omission of any person or entity in any

civil, criminal or administrative proceeding in any court, administrative agency or other tribunal.

19. Entire Agreement. The Stipulation constitutes the entire agreement among the

Parties hereto and supersedes any prior negotiations, agreements or understandings among them.

No representations, warranties or inducements have been made to any party concerning the

Stipulation or its exhibits other than as set forth herein.


13

20. Integration of Exhibits. All of the exhibits to the Stipulation, if any, are material

and integral parts hereof and are fully incorporated herein by this reference.

21. Headings. The headings contained herein are for reference purposes only and

shall not affect in any way the meaning or interpretation of this Stipulation.

22. Amendment. The Stipulation may be amended or modified only by a written

instrument signed by or on behalf of all Parties or their respective successors in interest.

23. Jointly Drafted. This Stipulation shall be deemed to have been jointly drafted by

the Parties, and in construing and interpreting this Stipulation, no provision shall be construed

and interpreted for or against any of the Parties because such provision or any other provision of

the Stipulation as a whole is purportedly prepared or requested by such Party.

24. Governing Law. This Stipulation shall be governed by and construed in

accordance with the internal laws of the State of Delaware, without giving effect to applicable

principles of conflicts of law to the extent that the application of the laws of another jurisdiction

would be required thereby.

25. Jurisdiction and Venue. The Bankruptcy Court shall retain jurisdiction with respect

to implementation and enforcement of the terms of the Stipulation, and all Parties submit to the

jurisdiction of the Bankruptcy Court for purposes of implementing and enforcing the settlement

embodied in the Stipulation. To the extent the Bankruptcy Court declines or lacks jurisdiction, the

Parties irrevocably consent to the jurisdiction of the courts of the State of Delaware and of any

federal court located within the State of Delaware for all purposes in connection with any action

or proceeding that arises out of or relates to this Stipulation.

26. Notices. Except as otherwise provided herein, notice to the Parties under this

Stipulation shall be sent to the following addresses:


14

Notice to Settling PIPE Plaintiffs:

Womble Carlyle Sandridge & Rice, LLP

Attn.: Matthew P. Ward, Esq.

222 Delaware Avenue, Suite 1501

Wilmington, DE 19801

Telephone: (302) 252-4338

Facsimile: (302) 661-7711

E-mail: [email protected]

Notice to Debtor: Hogan Lovells US LLP

Attn: Peter A. Ivanick, Esq.

875 Third Avenue

New York, New York 10022

Telephone: (212) 918-3000

Facsimile: (212) 918-3100

Email: [email protected] – and – Morris, Nichols, Arsht & Tunnell LLP

Attn: Eric D. Schwartz, Esq.

1201 N. Market St., 16th Floor

PO Box 1347

Wilmington, DE 19899-1347

Telephone: (302) 658-9200

Facsimile: (302) 658-3989

Email: [email protected]

27. Benefit of Agreement. The Stipulation shall be binding upon, and inure to the

benefit of, the successors and assigns of the Parties (and the Parties expressly agree that, for

purposes of this Stipulation and its enforcement, the Reorganized Debtor is a successor of the


15

Debtor and bound by its terms); provided, however, that this Stipulation is not intended to and

does not create any third-party beneficiaries.

28. Acknowledgement. Each of the Parties acknowledges that it has read all of the

terms of this Stipulation, has had an opportunity to consult with counsel of its own choosing or

voluntarily waived such right and enters into these terms voluntarily and without duress.

29. Authorization. Each of the undersigned is expressly authorized to take all

appropriate action required or permitted to be taken to effect the terms of the Stipulation, and

also is expressly authorized to enter into any modifications or amendments to the Stipulation.

Each counsel or other person executing the Stipulation or any exhibits on behalf of any Party

hereby warrants that such person has the full authority to do so as the Party’s authorized agent or

by power of attorney.

30. Counterparts; Facsimile. The Stipulation may be executed in one or more

counterparts and by facsimile or electronic mail, all of which shall be deemed to be one and the

same agreement.

Matthew P. Ward Womble Carlyle Sandridge & Rice, LLP 222 Delaware Avenue, Suite 1501 Wilmington, DE 19801 As counsel to the Settling PIPE Plaintiffs

Eric D. Schwartz Morris, Nichols, Arsht & Tunnell LLP 1201 N. Market St., 16th Floor Wilmington, DE 19801 As counsel to the Debtor

KaloBios Pharmaceuticals, Inc. By: Dr. Cameron Durrant Title: Chief Executive Officer & Chairman of the Board

RTAT, LLC (PIPE Plaintiff) By: Ron Tilles Title: Authorized Agent


16

Gregory Rea (PIPE Plaintiff)

Andrew Pizzo (PIPE Plaintiff)

Armistice Capital Master Fund, Ltd (PIPE Plaintiff) By: Title:

Edward Painter (PIPE Plaintiff)

Sabine Gritti (PIPE Plaintiff) By: by Power of Attorney

Nancy Retzlaff (PIPE Plaintiff)

WCSR 36208223v3


EXHIBIT A


stayed, modified, or amended, and as to which the time to appeal or seek certiorari has expired orbeen waived and no appeal or petition for certiorari has been timely taken, or as to which anyappeal that has been taken, or any petition for certiorari that has been, or may be, Filed has beenresolved by the highest court to which the order or judgment was appealed from or whichcertiorari was sought. The existence of the possibility that a motion under Rule 60 of the FederalRules of Civil Procedure, or any analogous rule under the Bankruptcy Rules, may be filed relatingto such order will not prevent such order from being a Final Order.

Former Counsel means Kaye Scholer LLP.

Former Counsel Claim means any claim or cause of action held by the Debtor, the Debtor’s estate or the Reorganized Debtor against Former Counsel arising out of or related to the PIPE Transaction.

General Bar Date means April 1, 2016, at 4:00 p.m. (ET) as set by the Bar Date Order,and applies, without limitation, to all Claims against the Debtor that arose prior to the PetitionDate, including, without limitation, any Claim arising from or relating to the purchase or sale ofthe Debtor’s common stock.

General Unsecured Claim means any Claim that is not an Administrative Claim, FeeClaim, Priority Tax Claim, Other Priority Claim, Secured Claim, Convenience Class Claim, PIPEClaim, IAC Claim, Class Action Claim or Other Subordinated Claim.

Government Bar Date means June 27, 2016, at 4:00 p.m. (ET) as set by the Bar DateOrder and section 502(b)(9) of the Bankruptcy Code, and applies to all governmental unitsholding Claims against the Debtor that arose or deemed to have arisen prior to the Petition Date.

Holder means a Person or an Entity who is the record or beneficial holder of a Claim orInterest as of the applicable date of determination or an authorized agent of such Person or Entity.

IAC Claim means any Claim that: (a) has not become “fixed” on or before theConfirmation Date within the meaning of such term as used in section 502(e)(2) of theBankruptcy Code; and (b) arises from or relates to, directly or indirectly, (i) any allegedindemnification obligation of the Debtor to any current or prior Holder of the Claim, (ii) anyalleged advancement obligation of the Debtor to any current or prior Holder of the Claim, (iii)related to any alleged contribution obligation of the Debtor to any current or prior Holder of theClaim. The term “IAC Claim” also includes any Claim of an Entity subrogated, or alleged to besubrogated, to the rights of a current or former Holder of a Claim that is an IAC Claim.

Impaired means, when used in reference to a Claim or Interest, a Claim or an Interest thatis impaired within the meaning of section 1124 of the Bankruptcy Code.

Initial Distribution Date means the Effective Date or as soon thereafter as is practicable.

Interest means the interest (whether legal, equitable, contractual or other rights) of anyHolders of any class of equity securities of the Debtor represented by shares of common or otherinstruments evidencing an ownership interest in the Debtor, whether or not certificated,

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mmclaughlin

Typewritten Text

transferable, voting or denominated “stock” or a similar Security, and any Claim or Cause ofAction related to or arising from the foregoing, or any option, warrant or right, contractual orotherwise, to acquire any such interest.

Interim Distribution Date means any date, other than the Final Distribution Date, after theInitial Distribution Date on which the Reorganized Debtor determines that an interim distributionshould be made to Holders of Allowed Claims in light of, among other things, resolutions ofDisputed Claims and the administrative costs of such a distribution.

Internal Revenue Code means the Internal Revenue Code of 1986, as amended.

IRS means the Internal Revenue Service of the United States of America.

Isensee Litigation means the putative class action litigation styled Isensee v. KaloBiosPharmaceuticals, Inc. et al., Case No. 15-cv-06331-EJD, pending in the United States DistrictCourt for the Northern District of California.

Judicial Code means title 28 of the United States Code, 28 U.S.C. §§ 1–4001.

KaloBios means KaloBios Pharmaceuticals, Inc.

Legal Requirement means means all federal, state, foreign and local laws, statutes, codes,rules, regulations, ordinances, orders, Proceedings and the like of any governmental unit (asdefined in 11 U.S.C. § 101(27)), including common law.

Li Litigation means the putative class action litigation styled Li v. KaloBiosPharmaceuticals, Inc. et al., Case No. 15-cv-05841-EJD, pending in the United States DistrictCourt for the Northern District of California.

Lien has the meaning set forth in section 101(37) of the Bankruptcy Code.

New Common Stock means the shares of common stock of Reorganized KaloBios, parvalue $0.01, to be issued by Reorganized KaloBios in connection with the implementation of, andas authorized by, this Plan. The Debtor shall issue not less than the number of shares of commonstock of Reorganized KaloBios necessary for (i) the Primary Plan Sponsor New Common Stock,(ii) the Secondary Plan Sponsor New Common Stock, and (iii) the Remaining New CommonStock. As part of the Plan Supplement, the Debtor will file a schedule that sets forth its estimateof the number of shares of New Common Stock to be issued under the Plan, which estimate shallbe subject to revisions from time to time through the conclusion of the Confirmation Hearing.

Nomis Bay Entity means Nomis Bay LTD and each Person or Entity that is a permittedassignee thereof.

Non-Released Parties means: (i) Martin Shkreli and the PIPE Plaintiffs with respect to any and all releases set forth in Section 10.3(a) the Plan (Debtor Releases) and any and all releases set forth in Section 10.3(b) of the Plan (Releases by Holders of Claims and Interests); and (ii) all Old Debtor Related Parties with respect to any and all releases set forth in Section 10.3(a) of the Plan (, (ii) Christopher Thorn, (iii) Former Counsel, (iv) Evan Greebel, (v) Chardan Capital Markets,

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LLC, and (vi) each Persons who commenced service as an executive officer or director of the Debtor Releases).on or before November 16, 2015.

Other Priority Claim means any Claim against the Debtor entitled to priority in right ofpayment under section 507(a) of the Bankruptcy Code, other than (a) an Administrative Claim or(b) a Priority Tax Claim.

Old D&O Parties means any and all Persons who commenced service as an executive officer or director of the Debtor on or before November 16, 2015.Old Debtor Related Parties means (i) Martin Shkreli, (ii) Christopher Thorn, (iii) Kaye Scholer LLP, (iv) Evan Greebel, (v) Chardan Capital Markets, LLC, and (vi) each of the Old D&O Parties.

Other Subordinated Claim means any Claim, except for a PIPE Claim or the Class ActionClaim, whether or not the subject of an existing lawsuit: (a) arising from rescission of a purchaseor sale of any Security of the Debtor; (b) for damages arising from the purchase or sale of anysuch Security; (c) for violations of any Legal Requirement relating to a Security, includingwithout limitation, any misrepresentation relating to any purchase, sale or issuance of a Security;(d) otherwise subject to mandatory subordination under section 510(b) of the Bankruptcy Code.The term “Other Subordinated Claim” as used herein also includes, without limitation, any and allattorneys’ fees, other charges, or costs relating to or arising out of a Claim that is itself an OtherSubordinated Claim.

Person has the meaning set forth in section 101(41) of the Bankruptcy Code.

Petition Date means December 29, 2015.

PIPE Claim means a Claim of a PIPE Plaintiff arising out of or relatingClaims means: (a) all claims and Causes of Action (whether or not “claims” within the meaning of section 101(5) of the Bankruptcy Code) that have been or could be asserted by any current or former PIPE Plaintiff in the PIPE Litigation; (b) the PIPE POCs; and (c) any and all claims and Causes of Action of the PIPE Plaintiffs (whether or not “claims” within the meaning of section 101(5) of the Bankruptcy Code), whether arising at law or in equity, known or unknown, that relate in any way, directly or indirectly, to the PIPE Transaction.

PIPE Investor means any purchaser in the PIPE Transaction, and any successor orassignee of such purchaser.

PIPE Litigation means the adversary proceeding captioned Gregory Rea, RTAT LLC,Edward H. Painter, Nancy Retzlaff, Armistice Capital Master Fund, Ltd, Andrew Pizzo, AndSabine Gritti v. KaloBios Pharmaceuticals, Inc., Adv. Pro. No. 16-50001 (LSS).

PIPE Plaintiffs mean the plaintiffs in the PIPE Litigation.

PIPE POCs means the following Proofs of Claim: Claim No. 100, Filed by Gregory Rea; Claim No. 101, Filed by Armistice Capital Master Fund, Ltd; Claim No. 106, Filed by Sabine Gritti; Claim No 98, Filed by RTAT LLC; Claim No. 105, Filed by Andrew Pizzo; Claim No. 102, Filed by Edward Painter; and Claim No. 103, Filed by Nancy Retzlaff.

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PIPE Settlement means that certain Settlement Stipulation, dated April 29, 2016, and executed by the Debtor and the Settling PIPE Plaintiffs.

PIPE Settlement Effectiveness Conditions shall have the meaning ascribed to such term in the PIPE Settlement.

PIPE Settlement Releases means the mutual releases to be granted by the Debtor and the PIPE Plaintiffs as set forth in Section 10.3(c) of this Plan.

PIPE Transaction means that certain private placement of KaloBios common stockdescribed in the Form 8-Ks filed by the Debtor on December 9, 2015, and December 16, 2015,pursuant to the Securities Purchase Agreement and related documents described or referencedtherein.

PIPE Transaction Shares shall have the meaning ascribed to such term in the PIPE Settlement.

Plan means this plan of reorganization for the Debtor, under Chapter 11 of theBankruptcy Code, including, without limitation, all applicable Exhibits, supplements, appendicesand schedules hereto, either in its present form or as the same may be altered, amended ormodified from time to time and in accordance with the provisions of the Bankruptcy Code andBankruptcy Rules and the terms hereof or thereof.

Plan Consideration means with respect to any Class of Claims or Interests entitled to adistribution under this Plan, Cash, Company Note and/or New Common Stock, as the contextrequires.

Plan Distribution means the payment or distribution under the Plan of Plan Consideration.

Plan Documents mean the documents, other than the Plan, to be executed, delivered,assumed, and/or performed in connection with the consummation of the Plan, including, withoutlimitation, the documents to be included in the Plan Supplement, the Plan Sponsor Documents,the Savant Acquisition Agreement, the certificate of incorporation and by-laws for theReorganized Debtor, the Schedule of Assumed Executory Contracts and Unexpired Leases andany and all Exhibits to the Plan and the Disclosure Statement.

Plan Sponsors mean, as context requires, (i) the Primary Plan Sponsor(s) and/or (ii) theSecondary Plan Sponsor(s), if any.

Plan Sponsor Documents means, as context requires, (i) the Primary Plan SponsorDocuments and/or (ii) the Secondary Plan Sponsor Documents, if any.

Plan Sponsor New Common Stock means, as context requires, (i) the Primary PlanSponsor New Common Stock and/or (ii) the Secondary Plan Sponsor New Common Stock, ifany.

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Proof of Claim means a proof of claim Filed with the Bankruptcy Court or the ClaimsAgent in connection with the Chapter 11 Case.

Rejection Bar Date means, with respect to a Rejection Damages Claim, the later of (i) theGeneral Bar Date and (ii) twenty-one (21) days after the effective date of rejection of theapplicable Executory Contract or Unexpired Lease as provided by an order of the BankruptcyCourt or pursuant to a notice under procedures approved by the Bankruptcy Court, unless theorder authorizing the rejection of such Executory Contract or Unexpired Lease providesotherwise, in which event the deadline set forth in such order will be the Rejection Bar Date withrespect to such Rejection Damages Claim.

Rejection Damages Claim means a claim arising out of or relating to the rejection of anExecutory Contract or Unexpired Lease.

Related Person means, with respect to any Person, such Person’s predecessors,successors, assigns and present and former affiliates (whether by operation of law or otherwise)and for each of the foregoing: (a) each of their current and former directors and officers, and anyPerson claiming by or through them; and (b) each of their respective members, partners,equity-holders, officers, directors, employees, representatives, advisors, attorneys, notaries(pursuant to the laws of the United States and any other jurisdiction), auditors, agents andprofessionals, in each case acting in such capacity, and any Person claiming by or through any ofthem.

Released Parties means each of (i) the Debtor, (ii) the Primary Plan Sponsor, (iii) each ofthe Stalking Horse Entities, whether or not such Stalking Horse Entity is acting as the PrimaryPlan Sponsor (but only if and to the extent the failure of such Stalking Horse Entity to act as thePrimary Plan Sponsor is not the result of its breach of any Primary Plan Sponsor Documents), and(iv) each of the foregoing Entities’ respective Related Persons; provided, however, that the Released Parties exclude any Entity that is a Non-Released Party.

Remaining New Common Stock means the New Common Stock to be distributed underthis Plan to the Holders of Allowed Class 4 Claims (PIPE Claims), the Allowed Class 6 Claim(Class Action Claim), and the Allowed Class 7 Claims (Other Subordinated Claims) in accordancewith the Treatment provided for such Classes of Claims in Article III of this Plan. The totalnumber of shares of Remaining New Common Stock to be issued under the Plan shall bedetermined with reference to the number of shares of Primary Plan Sponsor New Common Stockand Secondary Plan Sponsor New Common Stock required to be issued under the Plan inaccordance with the terms of the Primary Plan Sponsor Documents and any Secondary PlanSponsor Documents, respectively, after taking into account any anti-dilution requirements of suchPlan Transaction Documents for the benefit of the Primary Plan Sponsor and/or any SecondaryPlan Sponsor, as applicable. As part of the Plan Supplement, the Debtor will file a schedule thatsets forth its estimate of the number of shares of Remaining New Common Stock to be issuedunder the Plan, which estimate shall be subject to revisions from time to time through theconclusion of the Confirmation Hearing.

Reorganized Debtor or Reorganized KaloBios means the Debtor or any successor thereto,by merger, consolidation, or otherwise, on or after the Effective Date.

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Schedule of Rejected Executory Contracts and Unexpired Leases means a schedule of theExecutory Contracts and Unexpired Leases to be rejected pursuant to section 365 of theBankruptcy Code and Section 8.1 hereof, as such schedule may be amended from time to time.

SEC means the Securities and Exchange Commission created pursuant to the SecuritiesExchange Act of 1934.

Secondary Plan Sponsor means such Entity or Entities, if any, determined by order of theBankruptcy Court to be the Winning Bidder(s) for a Secondary Plan Transaction in accordancewith the Bid Procedures and Bid Procedures Order.

Secondary Plan Sponsor Documents means the definitive documentation for theSecondary Plan Sponsor’s Winning Bid for a Secondary Plan Transaction.

Secondary Plan Sponsor New Common Stock means the amount of New Common Stockto be issued to one or more Secondary Plan Sponsors pursuant to the Secondary Plan SponsorDocuments for such Secondary Plan Transaction(s). As part of the Plan Supplement, the Debtorwill file a schedule that sets forth its estimate of the number of shares of Secondary Plan SponsorNew Common Stock to be issued under the Plan, which estimate shall be subject to revisions fromtime to time through the conclusion of the Confirmation Hearing.

Secondary Plan Transaction means a transaction or transactions with the Secondary PlanSponsor to purchase New Common Stock under terms and conditions comprising a “SecondaryPlan Transaction,” as such term is used in the Bid Procedures.

Secured Claim means a Claim that is secured by a lien on property in which the Estate hasan interest or that is subject to setoff under section 553 of the Bankruptcy Code, to the extent ofthe value of the Claim holder’s interest in the Estate’s interest in such property or to the extent ofthe amount subject to setoff, as applicable, as determined pursuant to sections 506(a) and, ifapplicable, 1129(b) of the Bankruptcy Code.

Security has the meaning ascribed to the term “security” in section 101(49) of theBankruptcy Code.

Securities Act means the Securities Act of 1933 and the rules and regulations promulgatedpursuant thereto.

Securities Litigation means, collectively, the Li Litigation, the Isensee Litigation and theSciabacucchi Litigation.

Settling PIPE Plaintiffs shall have the meaning ascribed to such term in the PIPE Settlement.

Stalking Horse Entities means collectively (i) Black Horse Capital Master Fund Ltd, asagent for the DIP Facility, and Cheval Holdings, Ltd., Black Horse Capital LP, Black HorseCapital Master Fund Ltd., Nomis Bay LTD, and any other persons or entities acting as lenders forthe DIP Facility, and (ii) Cheval Holdings, Ltd., Black Horse Capital LP, Black Horse CapitalMaster Fund Ltd, Nomis Bay LTD, and any other Entities jointly investing with them to provide

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Class 3 - Convenience Class Claims.(c)

Classification: Class 3 consists of Convenience Class Claims.(1)

Treatment: Each Holder of an Allowed Convenience Class Claim(2)will receive Cash on the later of the Effective Date or the first reasonably practicable DistributionDate after such Claim becomes an Allowed Convenience Class Claim in an amount equal to theAllowed amount of such Convenience Class Claim. A Holder of an Allowed General UnsecuredClaim in a greater amount may elect to reduce its Allowed General Unsecured Claim to $5,000and have treated as a Convenience Class Claim for all purposes under the Plan.

Voting: Class 3 is Unimpaired under the Plan. Each Holder of an(3)Allowed Convenience Class Claim will be conclusively presumed to have Accepted the Planpursuant to section 1126(f) of the Bankruptcy Code. Therefore, each Holder of an AllowedConvenience Class Claim will not be entitled to vote to Accept or reject the Plan.

Class 4 - PIPE Claims.(d)

Classification: Class 4 consists of PIPE Claims.(1)

Treatment: Each Holder of a PIPE Claim will receive, one of the(2)following treatmentstreatment:

If Class 4 Accepts the Plan, then the PIPE Claim of (A)each Holder of a PIPE Claim that has Accepted the Plan will be Allowed and, on account of and in full and final satisfaction of such Allowed PIPE Claim, such Holder will: (i) retain the Existing Common Stock purchased by such Holder in the PIPE Transaction; (ii) receive (a) its pro rata share of [277,608] shares of Remaining New Common Stock [and (b) reimbursement of reasonable, documented attorneys’ fees incurred in connection with the PIPE Litigation up to $250,000 in the aggregate among all Holders of PIPE Claims that have accepted the Plan]. The number of shares of Remaining New Common Stock allocated to each Holder of an Allowed PIPE Claim shall be in a 1:1 ratio of the number of shares purchased by the Holder of such Allowed PIPE Claim in the PIPE Transaction.the PIPE Settlement Effectiveness Conditions, including the requirement that Class 4 Accept the Plan, are satisfied or waived in accordance with the PIPE Settlement, each PIPE Plaintiff, on account of, in exchange for, and in full satisfaction and settlement of all PIPE Claims and other good and valuable consideration, shall retain and receive his, her or its allocable portion of the PIPE Transaction Shares, the New Common Stock, the Cash payment, certain net proceeds of any Former Counsel Claim, and other good and valuable consideration, in each instance, subject to and in accordance with the terms of the PIPE Settlement, all of which are incorporated herein by reference.

If the PIPE Settlement Effectiveness Conditions, (B)including the requirement that Class 4 Accept the Plan (i.e., if Class 4 rejects the Plan), are not satisfied or waived in accordance with the PIPE Settlement, subject to subsection (C) immediately below, each PIPE Claim will be Disputed and subject to allowance or disallowance in accordancewith the outcome of the PIPE Litigation and/or the procedures for resolving Claims described inArticle VII of the Plan. All PIPE Claims will be subordinated to the level of common stock for

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distribution purposes under the Plan pursuant to section 510(b) of the Bankruptcy Code. TheHolder of any PIPE Claim that becomes an Allowed PIPE Claim will receive, on account of andin full and final satisfaction of such Allowed PIPE Claim, a pro rata share of Remaining NewCommon Stock, determined by the amount of such Allowed PIPE Claim as a percentage of thetotal Allowed PIPE Claims, Allowed IAC Claims, Allowed Class Action Claim, Allowed OtherSubordinated Claims, Allowed Existing Common Stock, and Allowed Class 9 Common Stock.

To the extent that any PIPE Claims areIf the PIPE (C)Settlement Effectiveness Conditions, including the requirement that Class 4 Accept the Plan (i.e., if Class 4 rejects the Plan), are not satisfied or waived in accordance with the PIPE Settlement, any PIPE Claim that is determined by Final Order not to be subject to subordination, each such PIPE Claim willshall be a Disputed PIPE Claim and subject to allowance or disallowance inaccordance with the outcome of the PIPE Litigation and/or the procedures for resolving Claimsdescribed in Article VII of the Plan. If such a Disputed PIPE Claim becomes an Allowed PIPEClaim, such Allowed PIPE Claim shall receive on account of and in full and final satisfaction ofsuch Allowed PIPE Claim, shares of Remaining New Common Stock of a value, as of the dateAllowed, equal to the Allowed amount of such PIPE Claim.

Voting: Class 4 is Impaired under the Plan. Each Holder of a PIPE(3)Claim is entitled to vote to Accept or reject the Plan.

Class 5 - IAC Claims.(e)

Classification: Class 5 consists of IAC Claims.(1)

Treatment: All IAC Claims in Class 5 will be disallowed(2)permanently and for all purposes under the Plan pursuant to section 502(e)(1) of the BankruptcyCode. To the extent, however, any IAC Claim is also an Other Subordinated Claim and becomesan Allowed Claim, it shall be deemed an Allowed Other Subordinated Claim and shall receivethat treatment provided for Allowed Other Subordinated Claims in Class 7 below.

Voting: Class 5 is Impaired under the Plan. Each Holder of a Class(3)5 Claim is entitled to vote to Accept or reject the Plan.

Class 6 - Class Action Claim.(f)

Classification: Class 6 consists of the Class Action Claim.(1)

Treatment:(2)

[TBD]; or(A)

If Class 6 rejects the Plan, the Class Action Claim(B)will be Disputed and subject to allowance or disallowance in accordance with the outcome of theSecurities Litigation and/or the procedures for resolving Claims described in Article VII of thePlan. To the extent Allowed, the Class Action Claim will be subordinated to the level of commonstock for distribution purposes under the Plan pursuant to section 510(b) of the Bankruptcy Code.If Allowed, the Class Action Claim will receive, on account of and in full and final satisfaction of

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Binding Effect; Plan Binds All Holders of Claims and Interests10.1

On the Effective Date, and effective as of the Effective Date, the Plan shall,(a)and shall be deemed to, be binding upon the Debtor and all present and former Holders of Claimsagainst and Interests in the Debtor, and their respective Related Persons, regardless of whetherany such Holder of a Claim or Interest has voted or failed to vote to Accept or reject this Plan.

Further, pursuant to section 1142 of the Bankruptcy Code and in(b)accordance with the Confirmation Order, the Debtor and any other necessary party shall execute,deliver and join in the execution or delivery (as applicable) of any instrument, document oragreement required to effect a transfer of property, a satisfaction of a Lien or a release of a Claimdealt with by the Plan, and to perform any other act, and the execution of documents necessary toeffectuate the Restructuring Transactions and all other documents set forth or contemplated in thePlan, including in the Plan Supplement, that are necessary for the consummation of the Plan andthe transactions contemplated herein.

Revesting of Assets10.2

Except as provided in the Plan, on the Effective Date, all property of the Estate, tothe fullest extent provided by section 541 of the Bankruptcy Code, and any and all other rightsand assets of the Debtor of every kind and nature, including, without limitation, insurancepolicies, shall revest in the Reorganized Debtor free and clear of all Liens, Claims and Interestsother than (a) those Liens, Claims and Interests retained or created pursuant to the Plan or anydocument entered into in connection with the Restructuring Transactions and (b) Liens that havearisen subsequent to the Petition Date on account of taxes that arose subsequent to the PetitionDate. On and after the Effective Date, except as otherwise provided in the Plan, theReorganized Debtor may operate its business and may use, acquire, or dispose of property andcompromise or settle any Claims, Interests, or Causes of Action without supervision or approvalby the Bankruptcy Court and free of any restrictions of the Bankruptcy Code or BankruptcyRules.

Releases10.3

Releases by the Debtor. AsSubject to Section 10.3(c) of the Plan as to (a)claims and Causes of Action against the PIPE Plaintiffs, as of the Effective Date, for goodand valuable consideration, the adequacy of which is hereby confirmed, each of the Debtor,the Debtor’s Estate, and the Reorganized Debtor, and any Person or Entity holding orseeking to exercise the rights of the Debtor, the Debtor’s Estate or the Reorganized Debtor,including, without limitation, any successor to the Debtor or any Estate representativeappointed or selected pursuant to section 1123(b)(3) of the Bankruptcy Code, shall bedeemed to forever release, waive, and discharge each of the Released Parties from any andall Claims, obligations, suits, judgments, damages, demands, debts, remedies, rights,Causes of Action (including Avoidance Actions), rights of setoff and liabilities whatsoever(including any derivative claims asserted on behalf of the Debtor) in connection with or inany way relating to the Debtor, the conduct of the Debtor’s business, the Chapter 11 Case,the Disclosure Statement, or the Plan, whether liquidated or unliquidated, fixed orcontingent, matured or unmatured, known or unknown, foreseen or unforeseen, then

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existing or thereafter arising, in law, equity, or otherwise, whether for tort, contract, violation of Legal Requirements applicable to Securities or otherwise, that are based inwhole or part on any act, omission, transaction, event, or other occurrence taking place onor prior to the Effective Date; provided, however, that nothing in this Section 10.3(a) of thePlan shall release, waive discharge, or be deemed to release, waive or discharge, orotherwise prohibit the Reorganized Debtor from asserting and enforcing:

(1) With (1) with respect to any Entity, any obligation under thePlan, Confirmation Order, Plan Documents (including, without limitation, the PlanSponsor Documents and the Savant Acquisition Agreement), or RestructuringTransactions;

(2) Without (2) without limiting the foregoing, with respect toany Stalking Horse Entity or Related Party, any obligation arising under or relating to anyof the Stalking Horse SPA Documents;

(3) (3) with respect to any Entity, any Claims, Causes of Action, obligations, suits,judgments, demands, debts, rights, causes of action or liabilities they may have against anyemployee, director or officer for any breach or enforcement of (a) any confidentialityobligation to the Debtor or Reorganized Debtor, (b) any misappropriation or infringementof trade secrets, patents, copyrights or other intellectual property of the Debtor orReorganized Debtor, (c) any contractual obligation for money owed to the Debtor or theReorganized Debtor, or (d) any contractual non-compete or similar obligation owed to theDebtor or Reorganized Debtor; or

(4) (4) with respect to any Non-Released Party, any claim or Cause of Action; or.

Entry of the Confirmation Order shall constitute the Bankruptcy Court’sapproval, pursuant to Bankruptcy Rule 9019, of the foregoing release by the Debtor, whichincludes by reference each of the related provisions and definitions contained herein orelsewhere in the Plan, and further, shall constitute the Bankruptcy Court’s finding that theforegoing release by the Debtor is: (1) in exchange for the good and valuable considerationprovided by the Released Parties, including, without limitation, the services on or after thePetition Date of the Debtor’s officers, directors, managers, attorneys, professionals andadvisors to whom such release applies in facilitating the Restructuring Transactionscontemplated hereby; (2) a good-faith settlement and compromise of the claims released bythe foregoing by the Debtor; (3) in the best interests of the Debtor and all Holders ofClaims and Interests; (4) fair, equitable and reasonable; (5) given and made afterconstitutionally adequate due process, proper notice and opportunity for hearing; and (6) abar to any of the Debtor or the Reorganized Debtor asserting any claim or cause of actionreleased pursuant to the foregoing release by the Debtor.

Releases by Holders of Claims and Interests. Notwithstanding (b)anything contained herein to the contrarySubject to Section 10.3(c) of the Plan as to claims or Causes of Action held by the PIPE Plaintiffs, as of the Effective Date, for good andvaluable consideration, the adequacy of which is hereby confirmed, the Holders of Claims

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against and Interests in the Debtor shall be deemed to forever release, waive, and dischargeeach of the Released Parties from any and all Claims, obligations, suits, judgments,damages, demands, debts, rights, Causes of Action, rights of setoff and liabilitieswhatsoever (including any derivative claims asserted on behalf of the Debtor) in connectionwith or in any way relating to the Debtor, the conduct of the Debtor’s business, theChapter 11 Case, the Disclosure Statement, or the Plan, whether liquidated orunliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen orunforeseen, then existing or thereafter arising, in law, equity, or otherwise, whether fortort, contract, violation of Legal Requirements applicable to Securities or otherwise, thatare based in whole or part on any act, omission, transaction, event, or other occurrencetaking place on or prior to the Effective Date; provided, however, that nothing in thisSection 10.3(b) of the Plan shall release, waive discharge, or be deemed to release, waive ordischarge, or otherwise prohibit such Holders of Claims or Interests from asserting andenforcing:(1) any Causes of Action or claims for contribution or proportionatefault that any Person who is a named defendant in the Securities Litigation may haveagainst any other Person (excluding the Debtor, the Reorganized Debtor and the Released Parties) that arises from or relates to the liability claims asserted against such Person insuch Securities Litigation; or .

(2) any Causes of Action or claims against any Old Debtor Related Parties that are Non-Released Parties to the extent the term “Non-Released Parties” applies to this Section 10.3(b).

Mutual Releases by Debtor and PIPE Plaintiffs Pursuant to PIPE (c)Settlement. If Class 4 (PIPE Claims) has Accepted the Plan and all other PIPE Settlement Effectiveness Conditions have been satisfied or waived in accordance with the terms of the PIPE Settlement, notwithstanding anything to the contrary in Section 10.3(a) or Section 10.3(b) of this Plan, the following releases shall be effective as between the Debtor and the PIPE Plaintiffs:

(1) As of the Effective Date, for good and valuable consideration, the adequacy of which is hereby confirmed, each of the Debtor, the Debtor’s Estate, and the Reorganized Debtor, and any Person or Entity holding or seeking to exercise the rights of the Debtor, the Debtor’s Estate or the Reorganized Debtor, including, without limitation, any successor to the Debtor or any Estate representative appointed or selected pursuant to section 1123(b)(3) of the Bankruptcy Code, shall be deemed to forever release, waive, and discharge each of the PIPE Plaintiffs and their respective Related Persons from any and all Claims, obligations, suits, judgments, damages, demands, debts, remedies, rights, Causes of Action (including Avoidance Actions), rights of setoff and liabilities whatsoever (including any derivative claims asserted on behalf of the Debtor) in connection with or in any way relating to the Debtor, the conduct of the Debtor’s business, the PIPE Claims, the Chapter 11 Case, the Disclosure Statement, or the Plan, whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, then existing or thereafter arising, in law, equity, or otherwise, whether for tort, contract, violation of Legal Requirements applicable to Securities or otherwise, that are based in whole or part on any act, omission, transaction, event, or other occurrence

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taking place on or prior to the Effective Date; provided, however, that nothing in this Section 10.3(c)(1) of the Plan shall release, waive discharge, or be deemed to release, waive or discharge, or otherwise prohibit the Reorganized Debtor from asserting and enforcing:

(A) with respect to any PIPE Plaintiff, any obligation under the PIPE Settlement or this Plan; or

(B) with respect to any Non-Released Party, any claim or Cause of Action.

(2) As of the Effective Date, for good and valuable consideration, the adequacy of which is hereby confirmed, the PIPE Plaintiffs shall be deemed to forever release, waive, and discharge each of the Released Parties from any and all Claims, obligations, suits, judgments, damages, demands, debts, rights, Causes of Action, rights of setoff and liabilities whatsoever (including any derivative claims asserted on behalf of the Debtor) in connection with or in any way relating to the Debtor, the conduct of the Debtor’s business, the PIPE Claims, the Chapter 11 Case, the Disclosure Statement, or the Plan, whether liquidated or unliquidated, fixed or contingent, matured or unmatured, known or unknown, foreseen or unforeseen, then existing or thereafter arising, in law, equity, or otherwise, whether for tort, contract, violation of Legal Requirements applicable to Securities or otherwise, that are based in whole or part on any act, omission, transaction, event, or other occurrence taking place on or prior to the Effective Date; provided, however, that nothing in this Section 10.3(c)(2) of the Plan shall release, waive, discharge, or be deemed to release, waive or discharge, or otherwise prohibit any PIPE Plaintiff from asserting and enforcing:

(A) with respect to the Debtor or Reorganized Debtor, as applicable, any obligation under the PIPE Settlement or this Plan;

(B) with respect to Chardan Capital Markets, LLC, any claim or Cause of Action, whether or relating to the PIPE Transaction or otherwise

For the avoidance of doubt, nothing in this Section 10.3(c)(2) of the Plan is intended to or shall release, waive, discharge or otherwise prohibit any PIPE Plaintiff from asserting or enforcing any direct claim or Cause of Action such PIPE Plaintiff has against any Person or Entity that is unrelated to the Debtor, the conduct of the Debtor’s business, the PIPE Claims, the Chapter 11 Case, the Disclosure Statement, or the Plan.

Discharge of Claims10.4

To the fullest extent provided under section 1141(d)(1)(A) and other applicableprovisions of the Bankruptcy Code, except as otherwise expressly provided by this Plan or theConfirmation Order: (1) all consideration distributed under this Plan shall be in exchange for, andin complete satisfaction, settlement, discharge and release of, all Interests and all Claims of anykind or nature whatsoever against the Debtor or any of its assets or properties and regardless ofwhether any property shall have been distributed or retained pursuant to this Plan on account of

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such Interests or Claims; (2) the Plan shall bind all Holders of Claims and Interests,notwithstanding whether any such Holders failed to vote to Accept or reject the Plan or voted toreject the Plan; and (3) all Persons and Entities shall be precluded from asserting against theDebtor, the Debtor’s Estate, the Reorganized Debtor, their respective successors and assigns, andtheir assets and properties any other Claims or Interests based upon any documents, instruments,or any act or omission, transaction, or other activity of any kind or nature that occurred prior tothe Effective Date. Except as otherwise expressly provided by this Plan or the ConfirmationOrder, upon the Effective Date, the Debtor shall be deemed discharged and released to the fullestextent provided under section 1141(d)(1)(A) of the Bankruptcy Code from any and all Claims ofany kind or nature whatsoever, including, without limitation, demands and liabilities that arose onor before the Effective Date, and all debts of the kind specified in section 502(g), 502(h) or 502(i)of the Bankruptcy Code.

Preservation of Rights of Action10.5

Except as otherwise expressly provided in this Plan, the Confirmation(a)Order or in any document, instrument, release or other agreement entered into in connection withthis Plan or approved by order of the Bankruptcy Court, in accordance with section 1123(b) ofthe Bankruptcy Code, the Debtor, its Estate and the Reorganized Debtor, as applicable, shallretain and may enforce all rights to commence and pursue, in its sole discretion, any and allCauses of Action, whether arising before or after the Petition Date, including, without limitation,(i) the Avoidance Actions, (ii) all Causes of Action to subordinate any Claims or Interests(whether pursuant to sections 510(a), 510(b) or 510(c) of the Bankruptcy Code, or otherwise),(iii) all Causes of Action against the Non-Released Parties to the extent not released in pursuantto Section 10.3(a), 10.3(b) or 10.3(bc) of this Plan, and (iv) all Causes of Actions identified in thePlan Supplement as Causes of Action retained pursuant to this Section 10.5(a) (collectively, the“Retained Causes of Action”), and the Reorganized Debtor’s rights to commence, prosecute, orsettle such Retained Causes of Action shall be preserved notwithstanding the occurrence of theEffective Date; provided that no Causes of Action released pursuant to Section 10.3(a) of thisPlan against the Released Parties shall vest in the Reorganized Debtor. No Entity may rely onthe absence of a specific reference in the Plan, the Plan Supplement, the DisclosureStatement, or the Confirmation Order to any Retained Cause of Action against them asany indication that the Debtor or the Reorganized Debtor will not pursue any and allavailable Retained Causes of Action against them. The Debtor and the Reorganized Debtorexpressly reserve all rights to prosecute any and all Retained Causes of Action against any Entity,except as otherwise expressly provided in the Plan.

Unless any Causes of Action against an Entity are expressly waived,(b)relinquished, exculpated, released, compromised, or settled in the Plan or a Final Order, theReorganized Debtor expressly reserves all Retained Causes of Action, for later adjudication, and,therefore no preclusion doctrine, including the doctrines of res judicata, collateral estoppel, issuepreclusion, claim preclusion, estoppel (judicial, equitable or otherwise), or laches, shall apply tosuch Retained Causes of Action upon, after, or as a consequence of the confirmation orconsummation of the Plan. In accordance with section 1123(b)(3) of the Bankruptcy Code, anyRetained Causes of Action that the Debtor may hold against any Entity shall vest in theReorganized Debtor. The Reorganized Debtor may pursue such Retained Causes of Action, or

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