(

)

Significant Accounting Policies

(a)

Basis of Preparation

The accompanying condensed consolidated balance sheets, statements of operations and cash flows as of

March

31,

2017

and for the

three

months ended

March

31,

2017

and

2016

are unaudited. The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) and applicable rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information and on a basis consistent with the annual financial statements and, in the opinion of management, reflect all adjustments which include only normal recurring adjustments, necessary to present fairly our financial position as of

March

31,

2017,

results of operations and cash flows for the

three

months ended

March

31,

2017

and

2016.

The results for the

three

months ended

March

31,

2017

are not necessarily indicative of the results to be expected for the year ending

December

31,

2017

or for any other interim period or for any other future year.

These condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form

-K for the year ended

December

31,

2016,

filed with the SEC on

March

30,

2017.

(b)

Liquidity

The Company has incurred net losses and negative cash flows from operations since its inception and had an accumulated deficit of

$63.0

million as of

March

31,

2017.

Management expects operating losses and negative cash flows to continue through at least the next several years.

Upon closing of the Merger Agreement, the combined company had approximately

$24.0

million in cash, including

$19.0

million of cash acquired as part of the Merger and

$4.4

million in net proceeds from the issuance of convertible notes in

October

2016.

Management believes cash of

$19.0

million as of

March

31,

2017

is sufficient to fund the Company for at least the next

twelve

-month period following the date of issuance of these financial statements. The Company also plans to raise other additional capital, potentially including debt and equity arrangements, to finance its future operations. If adequate funds are not available, the Company

may

be required to reduce operating expenses, delay or reduce the scope of its product development programs, obtain funds through arrangements with others that

may

require the Company to relinquish rights to certain of its technologies or products that the Company would otherwise seek to develop or commercialize itself, or cease operations. While the Company believes in the viability of its strategy to raise additional funds, there can be no assurances to that effect.

(c)

Use of Estimates

The preparation of the financial statements in accordance with U.S. GAAP requires Company management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment; allowances for doubtful accounts and sales returns; inventory valuation; fair value of the convertible preferred stock warrant liability; fair value of the maturity date preferred stock warrant liability; fair value of the convertible shareholder notes derivative liability; and share-based compensation.

(d)

Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All intercompany accounts and transactions have been eliminated during the consolidation process.

(e)

Significant Accounting Policies

The Company’s significant accounting policies are described in Note

of the notes to the financial statements included in the

2016

Form

-K. There have been no changes to those policies except as described below.

(f)

Recently Adopted Accounting Pronouncement

March

2016,

the FASB issued ASU

2016

09,

Compensation - Stock Compensation (Topic

718):

Improvements to Employee Share-Based Payment Accounting (ASU

2016

09).

The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification in the statement of cash flows and forfeitures. The Company adopted ASU

2016

effective

January

2017.

The impact of adopting ASU

2016

resulted in the following:

●

We will classify the excess income tax benefits from stock-based compensation arrangement as a discrete item within income tax expense, rather than recognizing such excess income tax benefits in additional

paid-in

capital.

The adoption of this guidance had no material impact to our condensed consolidated financial statements due to a full valuation allowance recognized against our deferred tax assets.

●

We elected to recognize forfeitures as they occur. The cumulative effect adjustment as a result of the adoption of this guidance on a modified retrospective basis was insignificant.

●

We applied the change in classification of cash flows resulting from excess tax benefits and cash paid by us when directly withholding shares for

tax-withholding

purposes on a retrospective basis. The adoption of these provisions did not result in changes in our condensed consolidated statements of cash flow.

There were no other material impacts to our condensed consolidated financial statements as a result of adopting this updated standard.

(g)

Recently Issued Accounting Pronouncements

May

2014,

the FASB issued ASU No.

2014

09,

Revenue from Contracts with Customers (Topic

606),

which provides comprehensive guidance for revenue recognition. ASU

2014

affects any entity which either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle of the guidance provides that a company should recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application in retained earnings.

August

2015,

the FASB issued ASU

2015

Revenue from Contracts with Customers, which deferred the effective date for implementation of the standard. Public entities are to apply the new standard for annual and interim reporting periods beginning after

December

15,

2017

and earlier application is permitted only as of annual reporting periods beginning after

December

15,

2016,

including interim reporting periods within that reporting period. The Company has not elected early adoption and has not concluded on an adoption method. The Company has formed a task force that is beginning to assess the Company’s customer contracts and the potential impacts the standard

may

have on previously reported revenues and future revenues.

Given the relatively small volume of revenue arrangements, the Company believes that the analysis will be completed in sufficient time to adopt the new standard when required.

February

2016,

the FASB issued ASU

2016

Leases (Topic

842),

which supersedes existing guidance on accounting for leases in “Leases (Topic

840)”

and generally requires all leases to be recognized in the consolidated balance sheet. ASU

2016

is effective for annual and interim reporting periods beginning after

December

15,

2018;

early adoption is permitted. The Company does not plan to elect early adoption. The provisions of ASU

2016

are to be applied using a modified retrospective approach. The Company is currently assessing the future impact of this ASU on its consolidated financial statements.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, and the American Institute of Certified Public Accountants did not or are not believed by management to have a material impact on the Company’s financial statement presentation or disclosures.