Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
☒
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No
☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes
☒
No
☐
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§235.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes
☒
No
☐
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
☐
No
☒
The aggregate market value of the voting
and non-voting common stock held by non-affiliates of the registrant as of June 30, 2017, the last business day of the registrant’s
most recently completed second fiscal quarter, was $8,627,586 based on a per share price of $2.43, which was the closing price
of the registrant's common stock on such date.
As of April 11, 2018, there were 52,996,631
shares of the registrant’s common stock, par value $0.01 per share, outstanding.
This report contains
forward-looking statements within the meaning of the federal securities laws. Any such statements that do not relate to historical
or current facts or matters are forward-looking statements. You can identify some of the forward-looking statements by the use
of forward-looking terms, such as “may,” “will,” “should,” “expect,” “could,”
“intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,”
“project,” “potential,” “forecast” or the negative of such terms and other comparable terminology.
Forward-looking statements in this report include, without limitation, statements related to our financial and operating performance,
our plans, strategies, objectives, expectations, intentions and adequacy of resources. Certain important risks, including those
discussed in the risk factors set forth in “Part I, Item 1A. Risk Factors” of this report, could cause results to
differ materially from those anticipated by some of the forward-looking statements. Some, but not all, of these risks include,
among other things:
The forward-looking
statements are based on our beliefs, assumptions and expectations of future events, taking into account all information currently
available to us. Forward-looking statements are not guarantees of future events or of our performance. These beliefs, assumptions
and expectations can change as a result of many possible events or factors, not all of which are known to us. You are urged to
carefully review the disclosures we make concerning risks and other factors that may affect our business and operating results,
including those made in “Part I, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and in “Part I, Item 1A. Risk Factors” in this report, and any of those made in our other reports
filed with the Securities and Exchange Commission. You are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. Except as required by law, we are not obligated to, and do not intend to, update or revise
any forward-looking statements, whether as a result of new information, future events or otherwise. You should refer to and carefully
review the information in future documents we file with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
General
Since 1983, Helios
and Matheson Analytics Inc. (“Helios and Matheson”, the “Company”, “we”, “us”
or “our”) has provided high quality information technology, or IT, services and solutions including a range of technology
platforms focusing on big data, business intelligence, and consumer-centric technology. More recently, to provide greater value
to stockholders, the Company has sought to expand its business primarily through acquisitions that leverage its capabilities and
expertise. The Company is headquartered in New York City, has an office in Miami Florida and has an office in Bangalore India.
The Company's common stock is listed on The Nasdaq Capital Market (“Nasdaq”) under the symbol “HMNY”.
Our website address is www.hmny.com. Information on our website is not a part of this report.
On November 9, 2016, we acquired Zone Technologies, Inc., a Nevada corporation (“Zone”), a
state-of-the-art mapping and spatial analysis company, and on December 11, 2017 we acquired a majority interest in MoviePass Inc.,
a Delaware corporation, whose primary product offering is MoviePass™, the nation’s premier movie theater subscription
service. MoviePass Ventures, LLC, a Delaware limited liability company (“MoviePass Ventures”), was formed in January
2018 and is a wholly-owned subsidiary of the Company.
MoviePass
Ventures aims to collaborate with film distributors to share in distribution fees while using the data analytics MoviePass offers
for marketing and targeting services for MoviePass’ paying subscribers using the platform. In April 2018, MoviePass Ventures
entered into an Acquisition Co-Financing and Distribution Agreement with Orchard Enterprises NY, Inc. for the purpose of co-funding
the acquisition, advertising and promotion of MoviePass Ventures’ first film, titled “American Animals”, which
premiered at the 2018 Sundance Film Festival.
Zone Technologies, Inc.
Zone
is the developer of the proprietary RedZone Map™, a GPS-driven, real-time crime and navigation map application whose goal
is to enhance personal safety worldwide by providing users with real time crime data and a platform for alerting other users to
criminal and other safety related occurrences in a navigation map format. Zone’s mapping lets users be pro-active when traveling,
allowing them to enter a number of different cautionary items such as traffic problems, police sightings, road hazards, accidents
and road closures. It also allows users to report a crime and to video upload live incidents.
While
RedZone Map is a fully functioning app available for free in the Apple App Store and the Google Play Store, the Company has not
yet derived any advertising or other revenues from the app.
Zone Spin-Off
In March
2018, we announced that our Board of Directors approved a plan to spin-off Zone, our wholly-owned subsidiary. Following the spin-off,
Zone would become an independent publicly traded company that we would expect to also be listed on Nasdaq. The spin-off is subject
to numerous conditions, including, the effectiveness of a Registration Statement on Form S-1 to be filed with the Securities and
Exchange Commission (the “Commission”), the approved listing of Zone’s common stock on Nasdaq.
Pursuant
to the spin-off, we plan to distribute shares of Zone common stock as a dividend to persons who hold common stock of the Company
as of a record date to be determined. The Company expects to set a record date to determine the stockholders entitled to receive
shares of Zone in the spin-off for approximately 20 to 40 days before the effective date of the spin-off. Holders of any convertible
notes and warrants of the Company outstanding as of the applicable record date may be entitled to participate in the dividend
of Zone shares in the spin-off in accordance with the terms of such notes and warrants. The strategic goal of the spin-off is
to create two separate companies, each of which can focus on its own strengths and operational plans and be publicly traded. There
is no assurance that we will be able to complete the spin-off, and our Board of Directors may at any time decide not to proceed
with the spin-off.
Acquisition of Majority Interest in MoviePass
On August
15, 2017, we entered into a Securities Purchase Agreement with MoviePass, which the Company and MoviePass amended on October 6,
2017 (collectively, the “MoviePass SPA”). On December 11, 2017, the Company completed its acquisition of a majority
interest in MoviePass (such acquisition, the “MoviePass Transaction”), pursuant to the MoviePass SPA.
At the
closing of the MoviePass Transaction (the “MoviePass Closing”), MoviePass issued to the Company shares of its common
stock representing 51.71% of its outstanding common stock in exchange for the following consideration: (1) a subordinated convertible
promissory note in the principal amount of $12,000,000 (the “Helios Convertible Note”), which is convertible into
shares of the Company’s common stock, subject to approval by the Company’s stockholders; (2) a $5,000,000 promissory
note issued to MoviePass (the “Helios Note”); and (3) the cancellation of a convertible promissory note issued by
MoviePass to the Company in an aggregate principal amount of $11,500,000.
In addition,
pursuant to the terms of the Note Purchase Agreement, dated as of December 11, 2017 (the “Kelly Note Purchase Agreement”),
among the Company, MoviePass and Christopher Kelly, a director, stockholder and noteholder of MoviePass (“Kelly”),
the Company agreed to purchase from Kelly, within two business days after the MoviePass Closing, MoviePass convertible promissory
notes in an aggregate principal amount of $1,000,000 (the “Kelly Notes”) for $1,000,000 in cash, which converted into
shares of MoviePass Common Stock amounting to an additional 2% of the outstanding shares of MoviePass Common Stock on a post-transaction
basis, pursuant to a Note Conversion Agreement entered into between the Company and MoviePass (the “Kelly Note Conversion
Agreement”).
On October
11, 2017, the Company and MoviePass also entered into an investment option agreement (the “Original Option Agreement”)
pursuant to which MoviePass granted the Company an option to purchase additional shares of common stock of MoviePass (the “MoviePass
Common Stock”) in an amount of up to $20 million (the “Original Option”). The Company exercised the Original
Option in full. Upon full exercise of the Original Option, the Company owned 62.41% of the outstanding shares of MoviePass Common
Stock (excluding shares underlying MoviePass options and warrants). In addition, pursuant to the Original Option Agreement, upon
the MoviePass Closing, the outstanding convertible promissory notes issued by MoviePass to the Company (each a “MoviePass
Option Note”) in an aggregate principal amount of $12,150,000 as of the MoviePass Closing date, including option exercises
by the Company on December 5, 2017 and December 7, 2017 in an aggregate amount of $2,800,000, were cancelled in exchange for additional
shares representing 8.7% of MoviePass’ common stock, plus additional cash payments to MoviePass aggregating $7,850,000.
Following
the full exercise of the Original Option, from December 19, 2017 through February 20, 2018, the Company provided cash advances
to MoviePass to support MoviePass’ working capital and operational requirements, as well as to support the expansion of
MoviePass’ business plans and objectives. The total amount advanced by the Company to MoviePass during this period totaled
$55,525,000 (the “Advance”).
On March
8, 2018, the Company entered into a Subscription Agreement with MoviePass (the “March 2018 Agreement”), pursuant to
which, in lieu of repayment of the Advance, MoviePass agreed to sell to the Company an amount of MoviePass Common Stock equal
to 18.79% of the total then outstanding MoviePass Common Stock (excluding shares underlying MoviePass options and warrants) (the
“March 2018 MoviePass Purchased Shares”), based on a pre-money valuation of MoviePass of $240,000,000 as of December
31, 2017. Pursuant to the March 2018 Agreement, MoviePass also agreed to issue to the Company, in addition to the March 2018 MoviePass
Purchased Shares, without payment of additional consideration by the Company, for purposes of anti-dilution, an amount of shares
of MoviePass Common Stock that caused the Company’s total ownership of the outstanding shares of MoviePass Common Stock
(excluding shares underlying MoviePass options and warrants), together with the March 2018 MoviePass Purchased Shares, to equal
81.2% as of March 8, 2018.
In addition, from
March 1, 2018 through April 12, 2018, the Company advanced a total of $35,000,000 to MoviePass (the “Second Advance”).
On April 16, 2018, the Company entered into an additional Subscription Agreement with MoviePass (the “April 2018 Agreement”),
pursuant to which, in lieu of repayment of the Second Advance, MoviePass agreed to sell to the Company an amount of MoviePass Common
Stock equal to 10.6% of the total then outstanding MoviePass Common Stock (excluding shares underlying MoviePass options and warrants)
(the “April 2018 MoviePass Purchased Shares”), based on a pre-money valuation of MoviePass of $295,000,000 as of March
31, 2018. Pursuant to the April 2018 Agreement, MoviePass also agreed to issue to the Company, in addition to the April 2018 MoviePass
Purchased Shares, without payment of additional consideration by the Company, for purposes of anti-dilution, an amount of shares
of MoviePass Common Stock that caused the Company’s total ownership of the outstanding shares of MoviePass Common Stock (excluding
shares underlying MoviePass options and warrants), together with the April 2018 MoviePass Purchased Shares, to equal 91.8% as of
March 8, 2018.
As of the
date of this report, the Company owns approximately 91.8% of MoviePass’ outstanding common stock (excluding shares underlying
MoviePass options and warrants).
Acquisition of Moviefone Assets from
Oath Inc. (a Verizon company)
On April 4, 2018, the Company completed the acquisition of Moviefone assets from Oath Inc
.,
an entertainment service owned by Oath Inc. (formerly, AOL Inc.), a wholly-owned subsidiary of Verizon Communications Inc. Moviefone
provides over 6 million monthly unique visitors full access to the entertainment ecosystem, from movie theaters to streaming content.
The Company believes the Moviefone acquisition will help MoviePass continue to grow its subscriber base and expand its marketing
and advertising platform for its studio and brand partners. The Company also believes Moviefone will allow the Company and MoviePass
to provide relevant and appealing content to moviegoers while simultaneously increasing the value of the Moviefone brand.
MoviePass Business
MoviePass
was incorporated in Delaware in 2011 and is the leading movie theater subscription service in the United States that allows members
to see a new movie every day in theaters nationwide for a low fixed price. Once they sign up for the MoviePass service online,
subscribers are prompted to download the MoviePass application on their smart phones and are then mailed a MoviePass debit card.
Customers can also subscribe with MoviePass via the MoviePass application. The MoviePass application shows subscribers the show
times of movies that are currently showing at the local movie theaters listed in the MoviePass application. The application highlights
selective films designed for a specific subscriber, which prominently displays the title once a subscriber opens the application.
MoviePass subscribers can use the debit card or, in select theaters, the MoviePass application, to purchase up to one movie ticket
per day at any of the movie theaters listed in the MoviePass application without paying any additional costs.
During
the four months after MoviePass’ announcement of its $9.95 per month subscription plan in August 2017, MoviePass grew to
over 1,000,000 total paying subscribers including those on either its monthly or annual plans. This represents strong growth when
compared to other subscription-based companies, such as Spotify, Hulu, ClassPass and Netflix, which achieved 1,000,000 subscribers
in over 5, 10, 17 and 39 months, respectively, estimated based on information available publicly from various news and other sources.
MoviePass surpassed 1,500,000 paying subscribers in January 2018 and 2,000,000 paying subscribers in February 2018.
On December
12, 2017, MoviePass and Fandor, the streaming service with the largest collection of independent films, documentaries, international
features and shorts, announced that both companies partnered with Costco Wholesale Corporation (“Costco”)
to
offer a one-year subscription plan for a flat fee of $70.00 paid in advance. The subscription plan for both services was made
available exclusively to Costco members for a limited time and covers a year of membership for both MoviePass and Fandor. The
subscription plan was extended through February 2018.
In February
2018, MoviePass and Fandor launched a limited-time annual subscription plan to allow movie-goers to see a new movie in a movie
theater every day for a year, and have access to the full Fandor content library for a year, for a flat fee of $
105.35
paid in advance ($7.95 per month plus a one-time $19.95 processing fee less $10 of revenue share with Fandor).
In March
2018, MoviePass announced that, for a limited time, it would offer its annual subscription to new subscribers for $6.95 per month,
paid annually and with a one-time processing fee of $6.55.
MoviePass
is led by
Theodore Farnsworth the Chairman and CEO of Helios and Matheson,
Mitch
Lowe, its Chief Executive Officer, Sanjay Puri, its Chief Strategy Officer, Bernadette McCabe, its Senior Vice President of Exhibitor
Relations, Mike Berkley, Chief Product Officer, Khalid Itum, Vice President of Business Development and Chris Kelly, its Chairman.
MoviePass Ventures
MoviePass Ventures
was formed as a Delaware limited liability company in January 2018 and is a wholly-owned subsidiary of Helios and Matheson. MoviePass
Ventures aims to collaborate with film distributors to share in waterfall profits and ancillary revenues while using the data
analytics MoviePass offers for marketing and targeting services for MoviePass’ paying subscribers using the platform.
MoviePass and MoviePass Ventures Market Opportunity
Motion Picture Association
of America Report
Movie going is embedded in American society and enjoyed by people of all races, ages and socio-economic
levels. The
2017 Theatrical Market Statistics Report
issued by the Motion Picture Association of America (the “MPAA Report”) reports that more than three quarters
(76%) of the U.S./Canada population aged two or older, or 263 million people, went to a movie at the cinema at least once in 2017.
According to the MPAA Report, the typical moviegoer bought 4.7 tickets per year in 2017, for a total of $1.24 billion in tickets
sold in 2017. Moreover, according to the MPAA Report, 12% of the U.S./Canada population are frequent moviegoers who attend the
cinema once a month or more. These individuals are responsible for 49% of all tickets sold. More than half the population are occasional
moviegoers (53%), who are also responsible for 49% of all tickets. In 2017, 24% of the U.S./Canada population did not attend the
cinema.
MoviePass
intends to encourage increased attendance at movie theaters with the subscription model by targeting the occasional movie goer
(those who attend less than once a month) who represent 82% of the total movie going market.
MoviePass’
current buying power at U.S. movie theaters represents approximately 6.1% of the U.S. box office, with MoviePass buying approximately
one in every seventeen tickets in the United States. Its strong subscriber trends and potential for customer engagement drive several
revenue opportunities. The value proposition to consumers to obtain low-cost access to regular theater attendance can benefit key
constituents and customers of MoviePass’ business: exhibitors, studios, distributors and consumers themselves. Through its
continued efforts at targeting and improving the consumer experience, MoviePass aims to maintain its strong subscriber growth and
to leverage such growth with its key constituents to improve operational efficiencies, create cross-platform synergies and create
multiple growing revenue streams.
Exhibitors
MoviePass
believes it is in a unique position to benefit movie exhibitors and theaters and to address the challenges they have faced in
recent years. Specifically, theater trends have pointed to stagnant sales, higher prices, lower attendance, consolidation and
limited customer engagement. The trends have been driven in part by a significant increase in in-home content. With its large
and growing subscriber base, MoviePass believe it is in a position to increase theater attendance, increase concession sales and
drive subscribers to consume movie content in the theaters rather than at home. MoviePass’ ability to drive theater attendance
can benefit theaters across the country, as MoviePass is currently available in over 91% of U.S. movie theaters.
Through
written agreements with various exhibitors throughout the U.S., MoviePass has put together a strategy to lift theater attendance
through Application Program Interface (API) integration and rigorous survey and statistical data. These arrangements with exhibitors
have ranged historically from short term trial programs to formal agreements spanning more than 8 months. MoviePass’ agreements
with exhibitors typically create revenue opportunities for MoviePass by (a) allowing MoviePass to purchase movie tickets directly
from the exhibitor at discounts, or (b) allowing MoviePass to receive rebates from exhibitors off tickets purchased at face value.
MoviePass works with the exhibitors to make up the discounted amount in MoviePass’ ticket prices by targeting its subscribers
to effect concession sales from such exhibitor partners to net the cost of the exhibitor ticket discount.
Under the terms of its exhibitor agreements, MoviePass places exhibitor partners’ theaters as a
priority within its services and API to provide top visibility for a partner exhibitor’s theater. MoviePass may also integrate
an exhibitor’s loyalty program with its own API for consumption and concession spend data and for
purposes of enabling MoviePass customers to earn benefits for movies they view at the selected exhibitor’s theaters. The placement and check-in from home features have been the primary
drivers of MoviePass’ lift in attendance for its partner locations. The exhibitor agreements also allow for MoviePass to
incorporate electronic ticketing, advanced ticketing, seat selection and show times at select exhibitor theaters. MoviePass’
arrangements with its exhibitor partners also allow subscribers to check in with exhibitor theaters from anywhere and to choose
their seats, which contrasts to other theaters with which MoviePass does not maintain exhibitor agreements. In such theaters,
MoviePass subscribers must be within 100 yards within location of the theater to check in.
MoviePass
is also currently working on additional planned features in conjunction with its exhibitor partners. These include “family
and friends” offerings, VIP lines, promotions and incentives for specific films which utilize surveys and other interactive
engagement tools with exhibitor patrons, distribution of vendor content within the application and a “night out at the movies”
program, in which MoviePass participates in revenue from its national brand partnerships. Through its “night out at the
movies” program,
MoviePass also believes it can create unique out-of-home experiences for its subscribers built around
movie-going. By partnering with ride-share companies, malls, local retailers and restaurants, MoviePass hopes to offer customers
discounted experiences (in addition to the movie ticket) built around a night at the cinema.
MoviePass
aims to use its integrated application technology to connect and direct consumers to exhibitors and to drive theater attendance
by creating profitable partnerships.
MoviePass
Ventures aims to leverage the Company’s and MoviePass’ ability to increase movie theater attendance for select films
through their advanced marketing efforts and working directly with distributors to drive consumers toward select independent films
and share in the economic performance of those films.
The Company
intends to combine its data and artificial intelligence technology with MoviePass’ technology. With our big data and artificial
intelligence platforms and other technologies that we own, we believe we will be able to bring a significant technological advantage
to MoviePass and MoviePass Ventures.
Studios
and Distributors
Through
its user-friendly mobile application and its targeted efforts to engage its growing list of subscribers, MoviePass has shown an
ability to drive its subscribers to see movies that they would not have otherwise seen. As a result, MoviePass has been pursuing
numerous opportunities with studios and independent distributors. MoviePass has closed several paid opportunities with different
studios and independent distributors to promote a variety of movies from limited releases to wide release blockbusters.
MoviePass offers
studios the ability to increase patronage of select movies by an active promotional strategy of select movie titles. In three recent
examples, MoviePass was able to use its strategy of actively promoting title to (i) increase a wide distribution opening box office
weekend for a film by 13.2%, (ii) increase a Thursday night preview showing for a film by 11.1% and (iii) increase a Thursday night
preview showing for another film by 27.2%. Up to the date of this report, MoviePass has promoted a total of 26 films, though MoviePass
does not disclose whether marketing campaigns for those films are from paid distributor engagements or whether the tests were approved
by distributors or studios. MoviePass also aims to create additional revenue opportunities with studios by driving subscribers
toward merchandise and products related to particular films.
MoviePass has entered
into a number of revenue producing agreements with film distributors aimed at increasing attendance for specific titles. Distributors
aim to leverage MoviePass’ large subscriber base by engaging MoviePass to target portions of its subscribers based on relevant
subscriber information and preferences obtained through subscribers’ use of the MoviePass application. MoviePass works to
increase attendance for select titles by sending its subscribers dedicated emails and push notifications for those titles at various
agreed-upon times aligned with the timing of a title’s release. The targeted emails are meant to capture subscribers who
reside within a certain radius of theaters where the select title is being screened. Various agreements also include additional
specific data-based targeting efforts, including hyper-targeting subscribers who saw up to a certain number of comparable titles,
using various creative messaging tactics via email.
MoviePass
also conducts extensive social media marketing campaigns under its agreements with distributors. As an example of a social media
marketing campaign, MoviePass may post dedicated content for a select movie title on social media on each of its branded platforms
on dates mutually agreed upon with the distributor. MoviePass will then hyper-target certain subscribers who saw a number of comparable
titles that have been released theatrically during a period of several months immediately prior to the release of the title in
question. It will then send up to three separate hyper-targeting emails to each of those subsets of viewers. In certain circumstances,
where a title in question is being released widely, MoviePass will provide these services to its entire subscriber base, while
excluding agreed upon control groups.
MoviePass may also designate such films with premium title placement within the MoviePass application
for various amounts of time. This includes the placement of MoviePass’ App Marquee, which appears on the opening screen of
the application. In conjunction with opening weekend attendance, MoviePass also conducts surveys of statistically-relevant sample
sizes for opening weekend attendees, after which it prepares aggregated
anonymous
survey results and data insights which it reports to distributors. MoviePass believes that its subscriber base is interactive and
connected, resulting in the ability of MoviePass through its marketing efforts to generate valuable impressions to consumers on
behalf of distributors.
MoviePass may also
enter into revenue producing arrangements with distributors for pre-release promotional screenings. On more than one occasion,
a distributor agreed to book an auditorium on behalf of MoviePass subscribers and facilitated their entrance to the screening.
MoviePass then agreed to work with the distributor to create an ideal user profile so that MoviePass can specifically target and
confirm audience members by viewing history for optimal marketing results. In other instances, distributors have agreed to be responsible
for facilitating a MoviePass screening of a select title in certain markets and to arrange for a number of tickets to be allocated
for MoviePass subscribers at special advance screenings and regional markets.
The agreements
typically have terms of effectiveness until the select title is no longer in theaters. The distributor agreements state that MoviePass
owns all rights to the data that is collected by MoviePass resulting from subscriber use of the MoviePass application, including
performance and statistical data that it collects based upon subscriber attendance and behavior, surveys conducted, structured
data, and visual representation of data.
Compensation
to MoviePass for its services under distributor agreements is comprised of fixed dedicated marketing fees and/or performance-based
marketing and targeting fees. MoviePass may also be entitled to receive fees, based on a certain percentage and timing of purchases
relative to the title’s release, for each ticket purchased by MoviePass, which fees due to MoviePass usually include a fixed
component and a variable component. MoviePass may also receive bonuses when it purchases a certain percentage of the tickets sold
of a select title in the US during opening weekend.
MoviePass
also conducts tests to optimize subscriber experience. MoviePass’ tests generally include testing marketing activities in
various sets using in app promotion and placement, social media and targeted email campaigns and push notifications to its subscribers,
and then comparing the markets where MoviePass conducted direct promotional efforts against non-promoted markets.
The Company
also hopes to leverage MoviePass’ relationships with studios to support MoviePass Ventures. By aiming to co-acquire films
or economic participation rights in films with distributors to bring films to the big screen and by driving turnout through the
MoviePass app, MoviePass Ventures aims to generate increased revenue participation in the film ecosystem. The Company believes
MoviePass Ventures’ theatrical releases would benefit from MoviePass’ target marketing platform and a data-driven
theatrical booking strategy. MoviePass’ relationships with studios may create opportunities for MoviePass Ventures to better
identify and select film opportunities for promotion and economic participation rights. MoviePass hopes that the ability to generate
more content for MoviePass’ subscribers may also lead to increased subscribers, lower attrition, and expanded use by MoviePass’
customers of various MoviePass offerings.
Consumers
MoviePass’
core business model rests largely on its ability to continue to improve the consumer experience. MoviePass aims to do this by
targeting a consumer experience that is mobile first, with features such as its “search & discovery” and “transact
and enjoy” tools in the MoviePass mobile application. The movie going experience for MoviePass subscribers is a simple process,
by which the subscriber first signs up for a monthly membership plan, for as low as $6.95 per month, and receives a MoviePass
debit card in the mail. The subscriber then uses the MoviePass application to, sequentially, choose a movie, choose a theater,
choose a show time and finally “check in.” The aim of MoviePass’ low cost and straightforward process is to
create an experience for consumers to see more movies, save money, and reduce regret of the movie going experience. MoviePass
believes that the simplicity of the process and the ability to engage with consumers through the various steps of the check-in
process through the app creates an opportunity to drive consumers to theaters more often and for select films. It also allows
MoviePass to derive data insights on interests, activities or spending.
MoviePass
aims to further engage consumers by means of its innovative technology platform dedicated to enhancing the exploration of cinema.
This includes a versatile, multi-feature application, whose current features include the ability to search movies and theaters,
and purchase or redeem tickets. MoviePass also maintains a customer service platform, meant to support its growing list of subscribers
and their utilization of the MoviePass application and other technology, and is continuing to work to improve the functionality
and utility of this platform.
Vista Partnership
Pursuant
to the terms of an API License and Services Agreement, effective as of January 16, 2017 (the “Vista Agreement”), MoviePass
has partnered with Vista Group International Ltd, (“Vista”) to work together to integrate Vista’s application
programming interfaces (“Vista API”) with MoviePass’ offerings, allowing for a programmatic transfer of information
between MoviePass and Vista. Vista is a leading global provider of cinema management software solutions, servicing over 1,700
movie theaters, which representing over 21% of this market in the United States. The Vista Agreement allows MoviePass and Vista
to: (i) share transactional information regarding movie tickets purchased by MoviePass subscribers, (ii) develop a specific protocol
for onboarding exhibitors and (iii) create mutual provisions for technical support services. The Vista Agreement gives MoviePass
the ability to integrate into Vista’s large customer base through the Vista API and to enable a more seamless, fully mobile
experience for MoviePass’ and Vista’s customers. The Vista Agreement works to benefit theaters by means of direct
integration into theater loyalty programs and to allow theaters to derive data and analytics on customer usage, location and demographics.
Under the Vista Agreement, consumers are able to use e-tickets from their mobile devices, invite friends with their mobile devices
and purchase food and beverage via mobile applications, all in cashless transactions. MoviePass hopes to utilize this partnership
to offer premier technological advantages to its customers relative to other competitors offering movie going promotions and services.
Technology and Payment Processing
MoviePass
is a party to card program management agreements for payment and processing services relating to the MoviePass debit card. MoviePass
also historically has utilized the sale of prepaid certificates generated by third party vendors. These various arrangements relating
to payment processing set forth the arrangements by which MoviePass works with a particular processor and an authorized bank to
ensure front end payment on the debit card and back end settlement of the theater payment transactions. They also allocate responsibilities
among the parties for handling, among other things, consumer complaints pertaining to non-acceptance payments.
Movie Theater Information
MoviePass
obtains relevant information on movie theaters, including show times, ratings and reviews through metadata obtained through various
licensed data agreements and content license agreements. These agreements set out the payment terms and relevant ownership and
publication information respecting information obtained and utilized by MoviePass to include in its application and to share with
its subscribers.
Information Technology Strategy
and Operations
Through
the legacy business of Helios and Matheson Analytics, we endeavor to provide high-quality, value-based offerings in the areas of
application value management, application development, integration, independent validation, infrastructure and information management
and analytics services. We believe that our integrated service of Big Data technology, advanced analytics, extensive domain expertise
in the areas of financial services and healthcare, including engaging data visualization, empowers our clients to unlock the value
of data to make better decisions. We believe that our focus on client satisfaction, business aware solutions and guaranteed delivery
provides tangible business value to our client base across banking, financial services, insurance and healthcare verticals.
Our IT Operations
Currently,
our IT services include application value management, application development, integration, independent validation, infrastructure,
information management and analytics services.
Customers
The revenues of the Company’s top three customers represented approximately 36.3% of
the revenues for the year ended December 31, 2017 and 91.3% of the revenues for the year ended December 31, 2016. Three customers
represented greater than 10% of the Company’s consulting revenues for such periods.
Primarily, we provide
our IT services to Fortune 1000 companies and other large organizations. The companies that we service operate in a diverse range
of industries with a concentration in the banking, financial services and automotive industries.
100% of the Company’s
revenues were derived from customers within the United States for the years ended December 31, 2017 and December 31, 2016.
Competition
IT
The market for IT
consulting and data analytics services is intensely competitive, affected by rapid technological advances and includes a large
number of competitors. The Company's competitors include the consulting divisions of the “Big Four” accounting firms,
major offshore outsourcing companies, systems consulting and implementation firms, application software development firms, management
consulting firms, divisions of large hardware and software companies, and niche providers of IT and data analytics services. Many
of these competitors have significantly greater financial, technical and marketing resources than the Company. Competition imposes
significant pricing pressures on the Company. The Company does not have a significant competitive presence in the IT services
industry.
MoviePass and MoviePass Ventures
The market
for filmed entertainment ticketing services is intensely competitive and subject to rapid change. MoviePass’ potential competitors
include Atom Tickets, MovieTickets.com, Fandango, AMC Entertainment Holdings Inc.’s AMC Stubs program, Regal Entertainment
Group’s Regal Crown Club and Cinemark Holdings, Inc.’s Movie Club, as well as other potential exhibitors offering
their own subscription services or loyalty programs. In addition, Sinemia Inc. offers a movie theater subscription service that
functions similarly to MoviePass.
AMC Stubs
is a loyalty program offered by AMC Entertainment Holdings Inc. with approximately 10.8 million household members. Movie goers
can join the loyalty program as either a basic member for free or a premiere member for $15. The basic membership offers free
popcorn refills, up to a $2 discount on tickets on Tuesdays, $5 rewards for every 5,000 points (points are earned at a rate of
20 points for every $1 spent), waived online ticket fees and free popcorn on the member’s birthday. Premiere members receive
a $5 discount on tickets on Tuesdays, earn 100 points for every $1 spent and all the other benefits that come with the basic membership.
Regal Entertainment
Group also offers a loyalty program with approximately 14 million active members called the Regal Crown Club. The program only
has one membership option and is free to join. Regal Crown Club members earn credits for every $1 they spend on movie tickets
and at concession stands. Points can be redeemed for rewards via the use of a physical card or a virtual card with Regal’s
mobile app. Rewards include free concession items, merchandise, movie tickets and more.
On December
5, 2017, Cinemark Holdings Inc. launched Movie Club. Movie Club is a monthly subscription plan that allows subscribers to buy
one movie ticket a month for a discounted price of $8.99. Members of Movie Club can roll over unused tickets from month to month
and receive a 20% discount on items bought at concession stands. Movie Club membership is only valid at Cinemark theaters.
Many of
these competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than MoviePass does. Some of these competitors have adopted, and may continue to adopt,
aggressive pricing policies and devote substantially more resources to marketing and website and systems development than MoviePass
does. In addition, MoviePass’ competitors may form or extend strategic alliances with studios, exhibitors and distributors
that could affect adversely MoviePass’ ability to compete on favorable terms.
As a new
entrant into film distribution, MoviePass Ventures will have competitors with longer operating histories in the distribution of
independent films, deeper ties with industry executives and film producers, and greater financial, marketing and other resources
than MoviePass Ventures. MoviePass Ventures will also face competition from larger film distributors which focus on higher budget
film production and distribution.
Employees
As of December 31,
2017, the Company had 65 employees in the United States, all of whom are full-time. 13 employees that were not included in the
total are third party consultants and 17 that were included in the total are executive, financial, sales and administrative personnel.
None of the Company’s employees are represented by a labor union and the Company has never incurred a work stoppage. As
of December 31, 2017, the Company had 6 employees in its Indian subsidiary. These include support staff in the human resources,
finance and administrative functions.
Intellectual Property Rights
Intellectual Property Rights Related to the Company’s
Legacy Business
The Company relies
upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect
its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property, but there
can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual
property rights. In addition, the Company is subject to the risk of litigation alleging infringement of third- party intellectual
property rights. Any such claims could require the Company to spend significant sums in litigation, pay damages, develop non-infringing
intellectual property or acquire a license to the intellectual property which is the subject of the asserted infringement.
Helios and Matheson Information Technology Ltd. (“HMIT”), the former parent of the Company,
granted us a non-exclusive, perpetual, royalty-free right to use the name “Helios and Matheson” and related trademarks,
service names and service marks. HMIT may terminate our right to use the name and related trademarks and service marks upon each
of the following events: (i) we consummate a business combination or merger, pursuant to which we are not the surviving corporation,
or we consummate a sale of all or substantially all of our assets without the consent or approval of HMIT or (ii) we file, or become
a debtor subject to, a bankruptcy proceeding which proceeding or filing was not commenced by HMIT or consented to by HMIT.
All ownership rights
to software developed by us in connection with a client engagement are typically assigned to the client. In limited situations,
we may retain ownership or obtain a license from the client, which permits us or a third party to market the software for the
joint benefit of the client and the Company or for the sole benefit of the Company.
Intellectual Property Rights Related to Zone’s Business
Zone owns the following patented technology:
Title
|
|
U.S. Patent No.
|
|
Patent Expiration
Date
|
Using Customer Relationship Management Data Exhibiting Unique
User Identifiers in a Cellular Network for Creating GEO Statistical Representations of the Users
|
|
8,285,307
|
|
February 15, 2029
|
Using Customer Relationship Management Data Non Exhibiting Unique
User Identifiers for Creating GEO Statistical Representations of the Users.
|
|
8,280,407
|
|
March 25, 2029
|
Tempo Spatial Data Extraction from Network Connected Devices
|
|
8,700,631
|
|
September 24, 2028
|
Zone has
two trademarks registered in the European Union (Stylized Eyes Design and REDZONE MAP) and one registered trademark in the United
Kingdom (Stylized Eyes Design) and has pending applications to register both trademarks in the United States and Israel and a
pending application to register REDZONE MAP in the United Kingdom. The name “RedZone Map” has been registered with
the State of Florida as a fictitious business name.
Intellectual Property Rights
Related to MoviePass’ Business
MoviePass
uses a combination of trademark, copyright and trade secret laws and confidentiality agreements to protect its proprietary intellectual
property. MoviePass has a registered trademark for the MoviePass name. MoviePass owns U.S. Patent Nos. 8,484,133, 8,612,235, and
9,135,578. MoviePass has filed applications for additional trademarks and two patents. MoviePass’ outstanding trademark
and patent applications may not be allowed. Even if these applications are allowed, they may not provide MoviePass with a competitive
advantage. Competitors may challenge successfully the validity and scope of MoviePass’ patents and trademark(s). MoviePass’
trademark(s), trademark applications, patents, and patent applications may not provide MoviePass with a competitive advantage.
To date, MoviePass has relied primarily on proprietary processes and know-how to protect its intellectual property related to
its Web site, mobile application and fulfillment processes.
From time
to time, MoviePass may encounter disputes over rights and obligations concerning intellectual property. MoviePass believes that
its service offering does not infringe the intellectual property rights of any third party. However, it cannot assure you that
MoviePass will prevail in any intellectual property dispute.
Seasonality
The Company’s
business is subject to seasonality swings, particularly during the holiday season during peak gift giving season. MoviePass typically
experiences upward swings in revenues from subscribers and increased sales during Thanksgiving and Christmas. MoviePass is also
impacted by theatrical seasonality and the studios’ movie release cycles, which correlate with overall theatrical box office
patterns.
Government Regulation
We are
not currently subject to direct regulation by any governmental agency other than laws and regulations applicable to businesses
generally, such as regulations requiring a business license, federal and state anti-discrimination in employment laws, workplace
safety laws and regulations and trade practices laws and regulations.
ITEM 1A. RISK FACTORS
We are subject to
various risks that may materially harm our business, prospects, financial condition and results of operations. An investment in
our common stock is speculative and involves a high degree of risk. In evaluating an investment in shares of our common stock,
you should carefully consider the risks described below, together with the other information included in this report.
The risks described
below are not the only risks that we may face or that could adversely affect us. If any of the events described in the following
risk factors actually occurs, or if additional risks and uncertainties later materialize that are not presently known to us or
that we currently deem immaterial, then our business, prospects, results of operations and financial condition could be materially
and adversely affected. In that event, the trading price of our common stock could decline, and you may lose all or part of your
investment in our shares. The risks discussed below include forward-looking statements, and our actual results may differ substantially
from those discussed in these forward-looking statements.
RISKS ASSOCIATED WITH OUR
BUSINESS
We changed our primary business
to the integration and development of MoviePass.
Since the
completion of our acquisition of a majority of the ownership interest of MoviePass Inc., we have primarily focused our resources
and business activities towards the integration and development of the MoviePass business. It is possible that we may not achieve
profitability with our MoviePass business.
Our independent auditors
have expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future
financing.
The report
of our independent auditors on our consolidated financial statements for the year ended December 31, 2017 included an explanatory
paragraph indicating that there is substantial doubt about our ability to continue as a going concern. Our auditors’ doubts
are based on our incurring significant net losses and our working capital position. Our ability to continue as a going concern
will be determined by our ability to obtain additional funding in the short term to enable us to continue the development and
integration of our MoviePass business.
RISKS ASSOCIATED WITH OUR MOVIEPASS
BUSINESS
If we fail to successfully integrate
MoviePass into our internal control over financial reporting, the integrity of our financial reporting could be compromised which
could result in a material adverse effect on our reported financial results.
As a private company,
MoviePass was not subject to the requirements of the Securities Exchange Act of 1934, as amended, with respect to internal control
over financial reporting. The integration of MoviePass into our internal control over financial reporting may require significant
time and resources from our management and other personnel and may increase our compliance costs. If we fail to successfully integrate
these operations, our internal control over financial reporting may not be effective. Failure to achieve and maintain an effective
internal control environment could have a material adverse effect on our ability to accurately report our financial results and
the market’s perception of our business and stock price.
MoviePass has incurred losses
since inception. To continue to support the business objectives of MoviePass, we have a present need for additional funding, which
may be unavailable to us.
MoviePass
has incurred losses since its inception and has a present need for additional funding. These factors raise substantial doubt about
the Company’s ability to continue as a going concern. For the foreseeable future, MoviePass expects to fund its operations
from additional debt or equity offerings and increased revenue from MoviePass subscribers and ancillary revenue streams. If MoviePass
cannot raise additional short-term capital, it may consume all of its cash needed for operations and, as a result, the expenditures
of the Company involved in supporting MoviePass may consume a significant amount of the Company’s cash needed for other
operations and business objectives. There are no assurances that we will be able to raise capital on terms acceptable to us. If
we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of the Company’s
planned growth or otherwise alter our business objectives and operations, which could harm our business, financial condition and
operating results.
MoviePass has a limited
operating history and history of net losses, and it is likely that they will experience net losses for the foreseeable future.
MoviePass
has experienced significant net losses since inception and, given the significant operating and capital expenditures associated
with its business plans, anticipate continuing to incur net losses and significant negative cash flows for the foreseeable future.
If MoviePass ever does achieve profitability, of which no assurances can be given, MoviePass may be unable to sustain or increase
such profitability.
To achieve
and sustain profitability, MoviePass, will need to accomplish numerous objectives, including substantially increasing the number
of paying subscribers to its service and securing additional sources of revenue and economies of scale. There is a significant
risk that MoviePass will be unable to achieve these objectives, which would damage MoviePass’ business and could lead to
the loss of the Company’s investment in MoviePass.
Further,
MoviePass currently spends more to retain a subscriber than the revenue derived from that subscriber and MoviePass other sources
of revenue are currently inadequate to offset or exceed the costs of subscriber retention. This results in a negative gross profit
margin. MoviePass expects its negative gross profit margin to remain significant until MoviePass can sufficiently increase its
other sources of revenues to offset the losses or achieve substantial economies of scale. There is no assurance that MoviePass
will be able to sufficiently increase its other sources of revenue or be able to achieve economies of scale that would reduce
the cost of revenue sufficiently to generate a positive gross profit margin. Failure to achieve positive gross profit margin in
the foreseeable future could materially and adversely impact our results of operations.
Increased monthly usage
by MoviePass’ subscribers will cause it to incur losses and negative cash flow.
MoviePass’
current monthly subscription pricing plans allow subscribers to see a new movie each day for the entire month. In most cases,
MoviePass pays the theaters the full cost for each movie ticket that a subscriber uses. Accordingly, increased movie viewing by
subscribers results in significant and increasing losses per subscriber and negative cash flow and adversely affects our financial
condition and results of operations.
MoviePass may not gain acceptance
from large national exhibitors (movie theater chains), which could have a material adverse effect on MoviePass’ financial
condition and results of operations.
MoviePass
has historically paid large national exhibitors full price for each ticket purchased by a MoviePass subscriber through the MoviePass
application (though in the past, MoviePass has received as much as a 20% discount on movie tickets for its subscribers from a
small group of exhibitor partners). Additionally, MoviePass has not historically received a benefit from any large national exhibitors
for driving MoviePass subscribers to their theaters (for example, in the form of a portion of concession sales). MoviePass anticipates
negotiating discounts on movie tickets and receiving a portion of concession sales to its subscribers attending theaters operated
by those exhibitor partners. However, if MoviePass is unable to partner with large national exhibitors, (i) MoviePass likely will
continue to be required to pay full price per movie ticket each time a MoviePass subscriber attends a movie theater operated by
a large national exhibitor, (ii) MoviePass would be unlikely to share in concession sales to its subscribers attending those theaters,
and (iii) MoviePass may not be able to sell digital advertising or data analytics services to those large national exhibitors.
If MoviePass is unable to negotiate discounted ticket prices from, share in concession sales with or sell digital advertising
or data analytics services to large national exhibitors, MoviePass’ financial condition and results of operations may be
materially and adversely affected, MoviePass may not become profitable and MoviePass may not be able to sustain its operations.
MoviePass may not gain acceptance
from large movie studios, which could have a material adverse effect on MoviePass’ financial condition and results of operations.
MoviePass’
success will depend, in part, on deriving revenue from sales of digital advertising and data analytics services to large movie
studios. However, if MoviePass is unable to gain acceptance from large national exhibitors (movie theater chains), upon which
large movie studios depend to distribute and exhibit their movies, then large movie studios may refrain from purchasing digital
advertising or data analytics services from MoviePass. If MoviePass is unable to derive revenue from selling digital advertising
or data analytics services to large movie studios, MoviePass’ financial condition and results of operations may be materially
and adversely affected, MoviePass may not become profitable and MoviePass may not be able to sustain its operations.
If MoviePass is not able
to manage its growth, its business could be affected adversely.
MoviePass’
subscriber base has expanded rapidly since August 15, 2017, when it announced its new subscription price of $9.95 per month. MoviePass
may not be able, for many reasons, including lack of financing or adequate personnel resources, to meet the demand to timely deliver
MoviePass cards to its subscribers or otherwise service its business. As such, MoviePass could experience a significant slowdown
or stoppage as it attempts to serve the expanding subscriber base.
MoviePass
anticipates that further expansion of its operations will be required to address any significant growth in its subscriber base
and to take advantage of favorable market opportunities. Any future expansion will likely place significant demands on its managerial,
operational, administrative and financial resources. If it is not able to respond effectively to new or increased demands that
arise because of MoviePass’ growth, or, if in responding, MoviePass’ management is materially distracted from current
operations, MoviePass’ business may be affected adversely.
MoviePass’ ability to develop and implement
new and updated features and services may be more difficult than expected and may not result in sufficient increases in revenue
to justify the costs.
Attracting
and retaining subscribers requires MoviePass to continue to improve the technology underlying its applications and to continue
to develop new and updated features, services and applications. If MoviePass is unable to do so on a timely basis, or if it’s
unable to implement new features and services without disrupting its existing applications, MoviePass may lose current and potential
subscribers. MoviePass relies on a combination of internal development, strategic relationships and licensing to develop its service
offering and related features. The development and implementation of new technologies, features and services may cost more than
expected, may take longer than originally expected, may require more testing than originally anticipated, or may require the acquisition
of additional personnel, technology and other resources. There can be no assurance that MoviePass’ revenue opportunities
from any new or updated technologies, applications, features or services will justify the amounts spent.
MoviePass’ success
depends on its ability to maintain the value of its brand. If events occur that damage its brand, MoviePass’ business and
financial results may be harmed.
MoviePass’
success depends on its ability to maintain the value of its brand. Maintaining, promoting, and positioning the MoviePass brand
will depend largely on the success of its marketing efforts and its ability to provide consistent, high quality products and services
through its applications. The MoviePass brand could be harmed if MoviePass fails to achieve these objectives or if its public
image or brand were to be tarnished by negative publicity. MoviePass’ reputation and brand may be harmed if it fails to
maintain a consistently high level of customer service. Executing the strategies necessary to maintain the value of its brand
may require MoviePass to make substantial investments, and these investments may not be successful. Such failures may adversely
affect MoviePass’ business, financial condition and operating results.
Any material disruption
or breach of MoviePass’ information technology systems or those of third-party partners could materially damage subscriber
and business partner relationships, and could subject MoviePass to significant reputational, financial, legal, and operational
consequences.
Despite
the implementation of security measures, the servers of MoviePass’ computing providers and other systems, and other third
parties on which MoviePass relies on, are vulnerable to damage from computer viruses, unauthorized access, natural disasters,
terrorism, war and telecommunication and electrical failures. Any material disruption or slowdown of MoviePass’ systems
or those of third parties on which MoviePass depends on, including a disruption or slowdown caused by MoviePass’ failure
to successfully manage significant increases in subscriber volume or successfully upgrade applicable systems, system failures,
viruses, security breaches, or other causes, could harm MoviePass’ brand and reputation, and cause revenues to decline.
To the extent that any disruption or security breach was to result in a loss of or damage to data or applications, or inappropriate
disclosure of confidential or proprietary information, MoviePass could incur liability and the further development of products
and services could be delayed. In addition, if changes in technology cause MoviePass’ information systems, or those of third
parties on which MoviePass depends on, to become obsolete, or if such information systems are inadequate to handle MoviePass’
growth, MoviePass could lose subscribers and its business and operating results could be adversely affected.
If MoviePass’ efforts
to attract and service subscribers are not successful, its revenues and results of operations will be affected adversely.
MoviePass
must continue to attract, retain and grow the number of its subscribers. To succeed, it must continue to attract a large number
of subscribers who have traditionally used online and pay cable channels, such as Netflix, HBO and Showtime, and pay-per-view
and video-on-demand as opposed to attending movie theaters. MoviePass’ ability to attract and retain subscribers will depend
in part on its ability to consistently provide subscribers a high quality experience for purchasing passes and viewing movies
in theaters. If consumers do not perceive MoviePass’ service offering to be of high quality, or if MoviePass introduces
new services that are not favorably received by customers, it may not be able to attract or retain subscribers. If its efforts
to satisfy its existing subscribers are not successful, MoviePass may not be able to attract new subscribers, and as a result,
its revenue and results of operations will be affected adversely.
If MoviePass is unable to
compete effectively, its business will be affected adversely.
The market
for filmed entertainment ticketing services is intensely competitive and subject to rapid change. MoviePass may experience competition
that could negatively affect demand for MoviePass’ service or ability to be accepted at certain theater chains. Current
potential competitors include Atom Tickets, MovieTickets.com, Fandango as well as potential exhibitors offering their own subscription
services.
Many consumers
maintain simultaneous relationships with multiple filmed entertainment ticketing providers and can easily shift spending from
one provider to another. If MoviePass is unable to successfully compete with current and new competitors and technologies, it
may not be able to achieve adequate market share, increase its revenues, or achieve and maintain profitability.
Many of
its competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than MoviePass does. Some of its competitors have adopted, and may continue to adopt, aggressive
pricing policies and devote substantially more resources to marketing and website and systems development than MoviePass does.
In addition, MoviePass’ competitors may form or extend strategic alliances with studios, exhibitors and distributors that
could affect adversely its ability to compete on favorable terms.
The loss by MoviePass of
one or more of its key personnel, or its failure to attract, assimilate and retain other highly qualified personnel in the future,
could seriously harm MoviePass’ existing business and new service developments.
MoviePass
depends on the continued services and performance of its key personnel, particularly its Chief Executive Officer Mitch Lowe and
other key members of management. In addition, much of MoviePass’ key technology and systems are custom made for its business
by its personnel. The loss of MoviePass key managerial and key technology personnel could disrupt its operations and have an adverse
effect on its ability to grow and expand its business.
We depend on motion picture production
and performance.
Owing to the stability
of the monthly subscription model MoviePass has substantially reduced exposure to any short term volatility that may be caused
by fluctuations in motion picture production and performance. We do not see a shortage of programming due to the diversity
and stability of our subscribers.
An increase in the use of alternative
film delivery methods or other forms of entertainment may drive down subscribers and movie goer attendance.
The continued disruption resulting
from the proliferation of alternative film delivery methods and the overwhelming pressure it has created for all
distributors and exhibitors is at the heart of our business model. We know that when we support or create a frequent
moviegoer that we are creating value across all platforms. With MoviePass our subscribers have proven that they will dramatically increase
the Movie going behavior on a sustained basis. We know that people still love going to the movies despite all
of the other options they may have.
A deterioration in general economic
conditions and its impact on consumer and business spending, particularly by customers in our targeted demographic, would adversely
affect our revenue and financial results.
Our business and financial
results are influenced significantly by general economic conditions, in particular, those conditions affecting discretionary consumer
spending. During past economic slowdowns and recessions, many consumers reduced their discretionary spending and advertisers reduced
their advertising expenditures. An economic downturn can result in reduced theater attendance, which could impact subscription
renewals.
For consumers, such
things as employment levels, fuel prices, interest and tax rates and inflation can significantly impact discretionary consumer
spending and as a result subscription growth or attrition.
We may face difficulty in integrating
the operations of the business we have acquired and may acquire in the future.
Acquisitions have
been and may continue to be an important component of our growth strategy; however, we will need to integrate these acquired businesses
successfully in order for our growth strategy to succeed and for us to become profitable. We will implement, and the management
teams of the acquired businesses will adopt, our policies, procedures and best practices, and cooperate with each other in aspects
of their operations. We may face difficulty with the integration of the businesses we acquire, such as coordinating geographically
dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures.
The business we acquired is not profitable and does not have sophisticated financial reporting systems in place, and we are relying
on their adoption of our best practices to operate their businesses more efficiently to achieve and maintain profitability. However,
we may fail in implementing our policies and procedures, or the policies and procedures may not be effective or provide the results
we anticipate for a particular business. Further, we will be relying on these policies and procedures in preparing our financial
and other reports as a public company, so any failure of acquired businesses to properly adopt these policies and procedures could
impair our public reporting. Management of the businesses we acquire may not have the operational or business expertise that we
require to successfully implement our policies, procedures and best practices.
In addition, our growth
strategy also includes the development of online properties that we intend to integrate across all of our businesses. This will
require, among other things, the integration of the individual websites and databases of each business we have or will acquire.
This will be a complex undertaking that may prove more difficult, expensive and time consuming than we expect. Even if we are able
to achieve this integration, it may not achieve the benefits we anticipate. If we fail to do this properly and in a timely manner,
it could harm our revenue and relationship with our subscribers.
RISKS ASSOCIATED
WITH OUR ZONE BUSINESS
The failure to successfully
monetize the RedZone Map™ App may adversely affect our future results of operations.
We anticipate
that we will be required to invest a significant amount of time and money in developing and monetizing the RedZone Map™
app which, if our efforts are unsuccessful, may not be recovered. To date, we have taken a charge to our profit and loss on our
balance sheet of approximately $6.3 million to write down the value of the intangibles related to our Zone acquisition. The failure
of consumers to use the RedZone Map™ app may result in the inability to successfully monetize the RedZone Map™ app.
Our failure to successfully develop and monetize the RedZone Map app may continue to adversely affect our results of operations.
Zone faces
intense competition. If we do not continue to innovate and provide top quality products and services that are useful to users,
our operating results could be adversely affected.
Consumers
have many map application choices like Google Maps and CrimeReports. While we believe that our offering of the RedZone Map™
app is unique given our advanced technology, crime data and navigation tool, there is no assurance that we may continue to incorporate
the most advanced mapping and data technologies. Some of our competitors have greater financial, technical and personnel resources,
which enable them to develop or use superior technologies and develop a user basis for their products and services that we are
not able to afford. If our technologies become obsolete, we may be placed at a competitive disadvantage.
New technologies that block
mobile advertising could adversely affect our business.
Zone’s
long-term business model depends greatly on advertising revenue derived from fees paid to it by advertisers in connection with
the display of advertisements. New technologies have been developed, and are likely to continue to be developed, that can block
the display of online or mobile advertisements. As a result, advertisement-blocking technology could in the future adversely affect
our operating results.
Any reduction in anticipated
spending by advertisers could harm Zone’s business.
Future
advertising revenues are critical to Zone’s business model and if advertisers’ spending on online or mobile advertising
is significantly reduced due to any political, economic, social or technological change or any other reason, our financial condition
could be adversely affected.
We are reliant on crime
data from multiple providers. Should we experience difficulty in acquiring that data, our business could be adversely affected.
Should
any of those providers discontinue providing data to us or we otherwise experience disruption in that pipeline, our operations
may be adversely affected. If any of those providers require us to pay a much higher fee to use their data in the future that
could substantially drive up the costs of our services.
Zone’s
business depends on mobile technology and continued, unimpeded access to internet and wireless services. Adverse changes to that
access could harm Zone’s business.
A few large
companies provide wireless services to consumers. If our users’ access to Internet and wireless services is interfered with
or limited due to any political, economic, social or technological reason, we may not be able to make RedZone Map™ readily
available to our users or may not be able to do so in an effective manner, including ensuring that the RedZone Map™ app
will remain accessible within an acceptable load time. Failure to provide our services in a timely manner without interruption
could generate consumer complaints and adversely affect our business.
Zone’s business model
depends on branding and marketing and failure to maintain and expand Zone’s user base or maintain a positive image could
harm Zone’s business.
We believe
that continued marketing efforts will be critical to achieve widespread acceptance of Zone’s products. Our marketing campaigns
may not be successful given the expense required. For example, failure to adequately maintain and develop our user base could
cause our future revenue growth to decrease. In addition, the RedZone Map™ app provides navigation recommendations based
on our database so that drivers can choose safer routes. If we are subject to any criticism for inaccurate information or an unsound
recommendation and such criticism negatively impacts the public perception of our RedZone Map™, that could harm our revenues
and business.
Increased regulatory scrutiny,
in particular, related to privacy and data security issues may negatively impact our business.
Although
we are not aware of any current or proposed federal, state or local laws or regulations that would have a material detrimental
effect on the RedZone Map™ app or our MoviePass products, there may be increased legal and regulatory scrutiny on our use
of data sources, technologies to process data and generate recommendations, the applicability of the recommendations and other
aspects of the app. This increased scrutiny may require us to make modifications or improvements to the current technologies we
use or may otherwise increase our regulatory compliance costs, which may adversely affect our business.
In particular,
the regulatory framework for privacy and security issues is evolving worldwide and is likely to remain in flux for the foreseeable
future. Various government and consumer protection agencies have also called for new regulation and changes in industry practices
along with increased enforcement of existing laws in the privacy and data security areas. Practices regarding the collection,
processing, storage, sharing, disclosure, user content, use and security of personal and other information by companies offering
online or mobile services is under increased public and regulatory scrutiny. Our business, including our ability to operate and
expand in the United States and internationally or on new technology platforms, could be adversely affected if new legislation
or regulations are adopted, interpreted or implemented in a manner that is inconsistent with our current business practices and
that require changes to these practices, the design of our website, mobile applications, products, features or our privacy policy.
In particular, the success of our business will be driven by our ability to responsibly use the data that we collect from our
users, key suppliers and other sources. Therefore, our business could be harmed by any significant change to applicable laws,
regulations or industry standards or practices regarding the storage, use or disclosure of data we collect, or regarding the manner
in which the express or implied consent of relevant persons for such use and disclosure is obtained. Such changes may require
us to modify our products and features, possibly in a material manner, and may limit our ability to develop new commercial applications
for such data as well as new products and features that make use of the data that we collect.
With the potential promulgation
of new laws or regulations, we could be subject to claims, lawsuits and other proceedings that may result in adverse outcomes.
Although
we are committed to making RedZone Map™ as high in quality as we are capable while maintaining full compliance with applicable
laws and regulations, there is no assurance that we will not be the subject of claims, lawsuits or other proceedings arising from
our technologies, products or services, especially if any new laws or regulations are promulgated which may greatly increase the
risk of litigation by users or third parties. Litigation could be costly and could divert us from focusing on our business operations.
If any litigation occurs and results in an adverse outcome, it could negatively impact our public image and brand and have a detrimental
effect on our expansion plans and operating results.
We may be subject to intellectual
property claims related to our Zone products, which are costly to defend and could result in and/or limit our ability to use certain
technologies in the future.
A third
party may sue us for infringing its intellectual property rights. Likewise, we may need to resort to litigation to enforce our
intellectual property rights or to determine the scope and validity of third-party intellectual property rights. The cost to us
of any litigation or other proceeding relating to intellectual property rights, even if resolved in our favor, could be substantial,
and the litigation would divert our efforts from our business activities. If we do not prevail in this type of litigation, we
may be required to pay monetary damages, stop commercial activities related to our products or obtain one or more licenses in
order to secure the rights to continue marketing our products and services related to Zone and using our technologies. Uncertainties
resulting from the initiation and continuation of any litigation could limit our ability to continue some of our operations. In
addition, a court may require that we pay expenses or damages.
If Zone’s security
measures are breached, or if RedZone Map™ is subject to attacks that degrade or deny the ability of users to access our
products and services, users may curtail or stop using our products and services, or we may be subject to protracted litigation,
which could harm our business.
Any of
our information security and processing systems, as well as third party data or network suppliers or our users, may experience
damage or disruption of service from a number of causes, including power outages, computer and telecommunication failures, computer
viruses, worms or other destructive software, internal design, manual or usage errors, cyber-attacks, terrorism, workplace violence
or wrongdoing, catastrophic events, natural disasters and severe weather conditions. We may also become the target of malicious
cyber-attack attempts. The security measures and procedures we, the third party suppliers and our users have in place to protect
personal data and other information may not be successful or sufficient to counter all data breaches, cyber-attacks or system
failures. Although we devote significant resources to our information security program and have implemented security measures
to protect our systems and data, there can be no assurance that our efforts will prevent these known or unknown threats.
If our
security measures are breached, we may incur significant expenses in addressing and resolving the resulting problems. If we are
sued in connection with any data security breach, we could be subject to protracted litigation. If unsuccessful in defending such
lawsuits, we may have to pay damages or change our business practices, any of which could harm our business. In addition, any
reputational damage resulting from a data breach, cyber-attack or system failure could decrease the acceptance and use of Zone’s
products and services, which could harm Zone’s prospective future growth.
Our intended spin-off of
Zone may result in substantial tax liabilities and additional costs to the Company.
We
have recently announced our intention to spin-off Zone to become a separate public company. If we move forward with the spin off,
and if the spin off does not qualify for tax-free treatment for U.S. federal income tax purposes, then, in general, we would be
subject to tax as if we sold the common stock of Zone in a taxable sale for its fair market value. Our stockholders would be subject
to tax as if they had received a taxable distribution equal to the fair market value of our common stock that was distributed
to them, taxed as a dividend (without reduction for any portion of our stockholder’s basis in its shares of our common stock)
for U.S. federal income tax purposes and possibly for purposes of state and local tax law, to the extent of a stockholder’s
pro rata share of our current and accumulated earnings and profits (including any arising from the taxable gain to us with respect
to the desired spin off). The amount of any such taxes to our stockholders and to us may be substantial.
RISKS ASSOCIATED
WITH OUR LEGACY BUSINESS
Our ongoing investment in
new technology is inherently risky and could disrupt our business.
To remain
competitive and grow we must continue to invest in new products and technologies and explore strategic investments. There is no
assurance that these investment endeavors will be successful or that the products and technologies developed by these investments
will be well received by the users. As our competitors use or develop new technologies, competitive pressures may force us to
invest in developing or implementing new technologies at a substantial cost. We cannot be certain that we will be able to develop
or implement technologies on a timely basis or at a cost that is acceptable to us. If we fail to develop or implement new technologies
in a cost-effective manner, our operations and financial condition may be adversely affected.
In our legacy business,
we rely on a concentrated client base for much of our revenue.
We rely on a small number of clients for a significant portion of our revenue in our legacy business.
During the years ended December 31, 2017 and December 31, 2016, our top four clients accounted for approximately 90.1% and 90.3%,
respectively, of our
consulting revenue. If we were to
lose any of these clients, we cannot assure you that they could be replaced quickly or at all. Our loss of any of these clients
could have a material adverse effect on our revenues and results of operations.
Our industry is subject to rapid change.
Our industry
is characterized by rapidly changing technology, evolving industry standards, frequent new product and service introductions,
evolving distribution channels and changing customer demands. We must adapt to rapidly changing technological and application
needs by continually improving our services as well as introducing new products and services to address user demands. Our success
will depend in part on our ability to develop IT solutions to meet client expectations, and offer services and solutions that
keep pace with continuing changes in IT, evolving industry standards and changing client preferences. If we are unable to keep
up with technological changes and changes in industry standards, our business, reputation and results of operations may be materially
adversely affected.
Our industry is intensely
competitive.
The market
for IT consulting and data analytics services is intensely competitive, affected by rapid technological advances and includes
a large number of competitors. Our competitors include the consulting divisions of the “Big Four” accounting firms,
major offshore outsourcing companies, systems consulting and implementation firms, application software development firms, management
consulting firms, divisions of large computer hardware and software companies, and niche providers of IT services. Many of these
competitors have significantly greater financial, technical and marketing resources than we have. Competition imposes significant
pricing pressures on us. If we are unable to compete successfully in our markets, our business and financial results will be materially
adversely affected.
Our success depends on our
ability to protect our intellectual property.
We rely
upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect
our proprietary rights and the proprietary rights of third parties from whom we license intellectual property, but there can be
no assurance that the steps we take in this regard will be adequate to deter misappropriation of proprietary information or that
we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights.
Infringement on the proprietary
rights of others could put us at a competitive disadvantage and any related litigation could be time consuming and costly.
Third parties
may claim that we violated their intellectual property rights. To the extent of a violation of a third party’s intellectual
property rights, we may be prevented from operating our business as planned, and may be required to pay damages, to obtain a license,
if available, or to use a non-infringing method if possible, to accomplish our objectives. Any of these claims, with or without
merit, could result in costly litigation and divert the attention of key personnel from our day-to-day operations. If such claims
are successful, they could result in costly judgments or settlements.
RISKS ASSOCIATED
WITH OWNERSHIP OF OUR COMMON STOCK
The sale of a substantial
amount of our common stock in the public market and the issuance of shares reserved for issuance to consultants and upon conversion
of convertible instruments could adversely affect the prevailing market price of our common stock.
As of April 11, 2018 we
had 52,996,631 shares of common stock issued and outstanding and the closing sale price of our common stock on that date was $2.94.
Pursuant to the resale registration statement on Form S-3 (file number 333-215313), declared effective by the SEC on January 13,
2017, we registered 3,926,293 shares of common stock for an institutional investor (the “Investor”) in connection
with the sale of our Senior Secured Convertible Notes on December 2, 2016 (the “December 2016 Notes”). On September
19, 2017, we entered into an Amendment and Exchange Agreement with the Investor, pursuant to which, among other things, the Investor
exchanged $10,000 in aggregate principal outstanding under the December 2016 Notes into a convertible note issued by us in the
amount of $697,000, which was subsequently converted in full into an aggregate of 232,334 shares of our common stock at a conversion
price of $3.00. In October 2017, we deregistered 1,999,862 shares of common stock from this registration statement after satisfying
the December 2016 Notes in full by issuing 1,926,431 shares of common stock and paying in cash $126,557 in interest. As of April
11, 2018, the institutional investor has sold all 3,926,293 shares of our registered common stock under this registration statement
that it received upon conversion of the December 2016 Notes, and all obligations under the December 2016 Notes have been satisfied.
On March
9, 2017 we filed a registration statement to register 3,332,075 shares of our common stock on Form S-3 (file number 333-216569)
for the Investor in conjunction with the sale of Senior Secured Convertible Notes completed on February 8, 2017 (the “February
2017 Notes”). The registration statement was declared effective by the SEC on April 26, 2017 (the “February 2017 Notes
Registration Statement”). Pursuant to a letter agreement dated August 27, 2017, the Investor converted $2.5 million in then
outstanding principal amount of the February 2017 Notes plus accrued but unpaid interest into an aggregate of 841,250 shares of
our common stock (the “February Share Amount”), and we provided Investor with the right to exchange shares of our
common stock up to the February Share Amount for a senior secured convertible note (the “Exchange Right”), which Exchange
Right the Investor exercised in October 2017 by exchanging 100,000 shares of our common stock into a senior secured convertible
note in the amount of $300,000 (the “February Exchange Note”). In October 2017, we also entered into that certain
Third Amendment and Exchange Agreement for the purpose of exchanging the February Exchange Note for 947,218 shares of our common
stock issued to the Investor, along with the right to receive 552,782 additional shares of our common stock. Subsequently, in
October 2017, we deregistered 1,479,189 shares of our common stock from the February 2017 Notes Registration Statement after satisfying
the February 2017 Notes in full by issuing 1,852,886 shares of common stock to the Investor and paying in cash $125,190 in interest.
The Investor has since sold all 1,479,189 shares that it received upon conversion of the February 2017 Notes, and all obligations
under the February 2017 Notes have been satisfied.
On September 15, 2017, we filed a registration statement to register 9,084,133 shares of our common stock
on Form S-3 (file number 333-220488) for the Investor in conjunction with the sale of Senior Secured Convertible Notes (the “August
2017 Notes”) and Warrants (the “August Warrants”) completed on August 16, 2017. We subsequently amended the registration
statement, in response to comments from the SEC, to decrease the amount of shares registered thereunder to 3,043,030. The amended
registration statement was declared effective by the SEC on December 4, 2017 (the “August 2017 Notes Registration Statement”).
On November 21, 2017, we entered into that certain Fourth Amendment and Exchange Agreement with the Investor for the purpose of,
among other things, (i) agreeing to reduce the number of shares of common stock required to be included in the registration statement
covering the shares underlying the August 2017 Notes and August Warrants and (ii) exchanging the August Warrants for a new warrant,
substantially in the form of the August Warrants, except as it relates to the exercise price and the expiration date (the “Exchanged
Warrant”). In addition, the Exchanged Warrant is subject to redemption, refund or alternate cashless exercise in certain
enumerated circumstances. As of April 11, 2018, the Investor has sold all
3,043,030
shares of our registered common stock under the August 2017 Notes Registration Statement that it received upon conversion of the
August 2017 Notes and exercise of the August Warrants, and all obligations under the August 2017 Notes have been satisfied. In
addition, as of April 11, 2018, the entire Exchanged Warrant has been converted into 4,353,581 shares of our common stock.
The issuances of the December 2016 Notes, the February 2017 Notes, and the August 2017 Notes (collectively,
the “Notes”) and the subsequent transactions, resulted in a high volume of activity for our securities. While no obligations
are currently outstanding under the Notes, we may engage the Investor in similar transactions, which transactions may include registration
rights. The registration of such additional securities and the potential for high volume trades of our common stock in connection
with these financings may have a downward effect on our market price. In addition, in connection with the Notes, the Company has
issued five-year warrants to a financial advisor, of which
810,401
are currently exercisable. Future issuance of our common stock upon exercise of these warrants may have a further negative impact
on our stock price.
Further, as a result of the issuance of additional convertible notes on each of November 7, 2017 and January
23, 2018, 9,639,043 shares of our common stock may be issuable upon conversion of outstanding
principal
debt. We have repaid in cash all unrestricted principal in the amounts of $26,650,000 and $25,000,000 under the November 7, 2017
and the January 23, 2018 notes, respectively, as a result of which no unrestricted principal remains outstanding as of the date
of this report. As such, the 9,639,043 shares noted above represent shares issuable upon conversion of restricted principal under
such convertible debt for which an equivalent amount owed to us under the applicable notes has not yet been paid. Such restricted
principal may not, as of the date of this report, be converted into any shares of our common stock. However, if holders of these
notes provide additional payments to us under these notes, these shares will no longer constitute restricted principal and may
be issuable by us to the holders.
Finally, as of April 11, 2018, we have reserved for issuance, but not yet issued, (i)
5,136,355
shares of common stock reserved for various officers, directors, employees and consultants, (ii) 4,000,001 shares of common stock
to MoviePass, upon receipt of stockholder approval, and (iii) 28,330,769 shares of common stock reserved for issuance upon exercise
of public warrants issued by us in registered public offerings with the SEC in December 2017 and February 2018. The issuance of
shares the Company is obligated to issue, and the issuance of shares the Company may issue in connection with conversion or exercise
of its outstanding convertible instruments, may result in a higher volume trading of the Company’s securities, which may
increase dilution of existing investors and further depress the market price of our common stock, which may negatively affect our
stockholders’ equity and our ability to raise capital on terms acceptable to us in the future.
The price of our common
stock has been volatile, and the market price of our common stock may decrease.
The per
share price of our common stock may vary from time to time. For example, the closing price of our common stock during 2017 was
as low as $2.23 and as high as $32.90. Market prices for securities of technology companies have historically been particularly
volatile. The factors that may cause the market price of our common stock to fluctuate include, but are not limited to:
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our ability to derive financial benefits from
our ownership stake in MoviePass;
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the ability of MoviePass to become cash flow
positive or profitable;
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the ability of MoviePass
Ventures to enter into economic arrangements with film distributors and derive economic benefits from such arrangements;
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our ability to recruit
and retain qualified personnel;
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changes in the perception
of investors and securities analysts regarding the risks to our business or the condition of our business;
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changes
in our relationships with key clients;
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changes
in the market valuation or earnings of our competitors or companies viewed as similar
to us;
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changes
in key personnel;
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changes
in our capital structure, such as future issuances of securities or the incurrence of
debt;
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the
granting or exercise of employee stock options or other equity awards;
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general
market and economic conditions.
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In addition,
the equity markets have experienced significant price and volume fluctuations that have affected the market prices for the securities
of technology companies for a number of reasons, including reasons that may be unrelated to our business or operating performance.
These broad market fluctuations may result in a material decline in the market price of our common stock and you may not be able
to sell your shares at prices you deem acceptable. In the past, following periods of volatility in the equity markets, securities
class action lawsuits have been instituted against public companies. Such litigation, if instituted against us, could result in
substantial cost and the diversion of management's attention.
Our outstanding convertible
notes contain provisions that may have a material adverse effect on our financial results
The holders
of our convertible notes have certain additional rights upon an event of default under the notes which could harm our business,
financial condition and results of operations and could require us to curtail or cease or operations.
Under our
senior convertible notes issued on November 7, 2017 and January 23, 2018, the holders have certain rights upon an event of default.
Such rights include (i) an increase in the interest rate to 15% per year for one month and 18% per year thereafter; (ii) the alternate
conversion price thereunder being adjusted to the lowest of (A) the applicable conversion price as in effect on the applicable
date of conversion, and (B) the greater of (y) the default floor price (which ranges from $1.83 to $11.44, depending on receipt
of applicable stockholder approvals and the terms of the applicable note), and (z) 75% of the lowest volume weighted average price
of the common stock for each of the 30 consecutive trading days ending and including the trading day of delivery or deemed delivery
of the applicable notice of conversion; and (iii) us being required to redeem all or a portion of the notes. At any time after
certain notice requirements for an event of default are triggered, a holder of the notes may require us to redeem all or any portion
of the notes by delivering written notice. Each portion of the notes subject to this redemption would be redeemed by us in cash
by wire transfer of immediately available funds or shares of our common stock, at the election of the holder, at a price equal
to the greater of (I) 125% of the outstanding amount to be redeemed and (II) the product of (a) the outstanding amount to be redeemed
divided by the conversion price multiplied by (b) the product of (1) 125% multiplied by (2) the highest closing sale price of
the common stock on any trading day during the period commencing on the date preceding such event of default and ending on the
date we make the entire payment required to be made under the notes. We may not have sufficient funds to settle the redemption
price, or we may be required to issue shares that could result in significant dilution to our existing stockholders and drive
down the market price of our securities.
While we
do not, as of the date of this report, have any unrestricted principle outstanding under these senior convertible notes, the holders
may make prepayments under the unpaid portion of their corresponding investor notes, which would result in us incurring further
repayment obligations under the convertible notes, which in turn could exacerbate the results of an event of default under the
convertible notes, as described above. Any resulting exercise of any of these rights upon an event of default could substantially
harm our financial condition and force us to curtail or cease operations. For a more complete discussion of the senior convertible
notes we issued on November 7, 2017 and January 23, 2018, please see the Current Reports on Form 8-K we filed with the Commission
on November 6, 2017 and January 11, 2018, respectively.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
The Company’s
executive office is located at the Empire State Building, 350 Fifth Avenue, Suite 7520, New York, New York 10118. The Company’s
executive office is located in a leased facility with a term expiring on June 30, 2022. Zone leases an office located at 444 Brickell
Avenue, Miami, Florida 33131. Zone’s lease term will expire on April 30, 2020. The Company’s Indian subsidiary has
an office in Bangalore, India at a leased facility located at 3rd Floor, Beta Block, Number 7 Sigma Tech Park, Varthur Kodi, Bangalore
560066. This lease was amended on September 26, 2017 to extend the duration of the lease until September 30, 2019. We are currently
looking to consolidate offices for our current operations. MoviePass currently rents office space on a month to month basis at
a shared office complex located at
175 Varick St, New York, NY 10014.
ITEM 3. LEGAL PROCEEDINGS
On August 24, 2016,
3839 Holdings LLC (“3839 Holdings”) filed a summons and complaint in the Supreme Court of the State of New York, New
York County, against Theodore Farnsworth, our Chief Executive Officer and Chairman, Highland Holdings Group, Inc. (“HHGI”)
and Zone. The claims arose out of 3839 Holdings’ purchase of a 10% interest in HHGI and an unsuccessful real estate investment
by HHGI. On or about December 7, 2016, 3839 Holdings amended the complaint to add the Company as a defendant. On November 24,
2017, the Supreme Court of the State of New York granted the motion to dismiss of Zone and the Company, and all claims asserted
by 3839 Holdings against Zone and the Company have been dismissed. Since then, 3839 Holdings has filed a Notice of Appeal. To
date, 3839 Holdings has not perfected its appeal.
On February 23, 2018,
MoviePass filed a patent infringement complaint against Sinemia, Inc.in United States District Court, Central District of California.
MoviePass’s complaint asserts infringement of two U.S. patents, U.S. Patent Nos. 8,484,133 (“Secure targeted personal
buying/selling method and system”) and 8,612,325 (“Automatic authentication and funding method”) by Sinemia’s
movie-ticket subscription service. MoviePass’s complaint requests damages and an injunction. As of the date of this report,
Sinemia has not yet responded to the complaint.
The Company is party
to routine litigation and administrative complaints incidental to its business. The Company does not believe that the resolution
of any or all of such current routine litigation and administrative complaints is likely to have a material adverse effect on
the Company’s financial condition or results of operations.
There are no proceedings
in which any of the directors, officers or affiliates of the Company, or any registered or beneficial holder of more than 5% of
the Company’s voting securities, is an adverse party or has a material interest adverse to that of the Company.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable
PART III
Item 10. Directors, Executive Officers
and Corporate Governance
Our Directors and Officers
The following table
sets forth the names and ages of all of our directors and executive officers. Our officers are appointed by, and serve at the
pleasure of, the Board.
Name
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Age
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Position
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Theodore Farnsworth
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55
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Chief Executive Officer, Chairman
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Stuart Benson
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57
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Chief Financial Officer, Secretary
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Prathap Singh
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51
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Director
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Muralikrishna Gadiyaram
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65
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Director
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Gavriel Ralbag
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34
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Director
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Carl J. Schramm
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70
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Director
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The
following is biographical information for each of our executive officers and directors.
Theodore Farnsworth
Theodore
Farnsworth has served as the Chairman of our Board of Directors and as the Chief Executive Officer of our wholly-owned subsidiary,
Zone Technologies, Inc., since November 9, 2016 and as our Chief Executive Officer since January 20, 2017. An expert in strategic
development, marketing and consumer relations, Mr. Farnsworth has utilized these assets and skills building companies throughout
his 30-year career. He has owned and operated numerous companies with proprietary products with recognized brand names that he
actively helped to develop. Prior to his service with Zone, Mr. Farnsworth was the Manager and Sole Member of Highlander Development
I, LLC from January 2014 until September 2016, and was the CEO of Source Vitamin Co Inc., from May 2009 until September 2013.
Prior
to the merger of Zone Acquisition, Inc. into Zone, which was completed on November 9, 2016, Mr. Farnsworth, as President of Zone,
developed the idea for the RedZone Map application while on a visit to Israel.
His
entrepreneurial expertise has been sought for many speaking engagements and feature articles in numerous publications, including
Forbes, Fortune, Investor’s Business Daily, The Wall Street Journal and The New York Times. Over thirteen years ago, Mr.
Farnsworth founded the charitable Far West Haiti Mission, providing education, housing and work incentives, and additionally founded
a school for the blind at the Mission.
Mr.
Farnsworth’s extensive business experience and his extensive involvement with Zone led us to conclude that he should serve
as a director.
Stuart Benson
Mr.
Benson provided consulting services to us from September 2016 until his appointment as Chief Financial Officer in November 2016.
Mr. Benson is a seasoned finance and accounting officer with over 25 years’ experience. From 2008 through August 2016, Mr.
Benson was Senior Vice President of Finance for A+E Network’s International division (a Hearst and Disney company) where
he oversaw finance, accounting, reporting, and strategic planning. From 1997 to 2006, Mr. Benson was Controller and Vice President
of Finance and, from 2006 to 2008, Chief Financial Officer, of Sundance Channel LLC. Mr. Benson began his career in 1982 as a
senior accountant with J. H. Cohn and Company in New Jersey. Mr. Benson received a B.S. degree from the University of Maryland.
Prathap Singh
Mr.
Singh has served as a director of the Company since April 1, 2016. Mr. Singh is a management consultant. During his 28 years of
overall professional experience, he has consulted for a number of companies in diversified sectors including, IT, real estate,
fast moving consumer goods, and mergers and acquisitions.
Multi-faceted
and multi-linguistic, Mr. Singh possesses excellent verbal and written communication skills. In handling both Indian and U.S.
operations, Mr. Singh travels extensively between the U.S. and India and has been spending 6 months in the U.S. and 6 months in
India every year for the past several years. In doing so, Mr. Singh has gained broad experience in public relations, liaising
and lobbying with the U.S. and Indian governments, gaining a deep understanding of the respective political systems, and building
extensive connections with government agencies, the judiciary, and bureaucracy in both governments, as well as with the corporate
world and capital markets such as the NYSE, NASDAQ & BSE. He has also served as General Secretary and Chairman of the Press
Committee for a national political party in India. In addition, Mr. Singh has led bilateral trade delegations in his capacity
as the International Business and Economic Development Coordinator for U.S. city and county governments, and also as Vice President
for the Asian Indian Chamber of Commerce, USA. These delegations have served as a business and economic development catalyst between
India and the U.S.
Mr.
Singh holds several other distinctions as well, including being a business partner for LG CNS, a consulting Marketing Director
managing mergers and acquisitions for the law firm Sharma & Yakshi Associates LLC, in Atlanta, Georgia, and a business advisor
for state government-owned financial institutions and industry bodies such as KSFC & KASSIA in India. He is a former international
baseball player and a life patron of ISKCON, Krsna.
Mr.
Singh brings to the Board valuable insight into management issues as well as extensive experience in public relations and business
development in U.S. and India, which led us to the conclusion that he should serve as a director.
Muralikrishna
Gadiyaram
Muralikrishna
Gadiyaram has been a director since November 9, 2016. Mr. Gadiyaram co-founded HMIT in 1991 and has been a member of its board
of directors since that time and has been its Chief Executive Officer since March 1991. Prior to founding HMIT, he had 15 years
of senior level work experience in marketing and commercial areas. Mr. Gadiyaram is primarily responsible for giving a customer
oriented focus to the organization. His strengths include team building and forging lasting relationships with institutional clients.
Mr. Gadiyaram is a gold-medalist graduate in science with post-graduate education in business management from the Indian Institute
of Management in Ahmedabad, India. On January 21, 2016, HMIT became subject to a liquidation order by an Indian Court resulting
from creditors’ claims against HMIT. On February 15, 2016, the High Court of Judicature at Madras (Civil Appellate Jurisdiction)
issued an order of interim stay of the liquidation order, providing HMIT with an opportunity to work out the claims of its creditors.
Mr.
Gadiyaram’s long experience with HMIT, the business of which is similar to ours but conducted outside of the United States,
gives him an exceptional understanding of our business and led us to believe that he should serve as a director.
Gavriel Ralbag
Gavriel
Ralbag has been a director since November 9, 2016. Mr. Ralbag specializes in commercial real estate and finance brokerage. He
currently works with Gold Edge Capital, where, since 2012 he has served as Managing Director. Mr. Ralbag has experience in a wide
variety of commercial financing transactions throughout the United States, including transactions involving multi-family housing,
shopping centers, ground-up development, rehab conversions and wholesale business loans. He served as director for International
Advisers, founding and heading the U.S. branch of this global debt recovery corporation headquartered in The Netherlands, from
2009 to 2012. He served as a broker/analyst with Palladium Capital Advisors LLC from 2007 to 2009 and began his career interning
with Maxim Group LLC. Mr. Ralbag volunteers his time and assists with fundraising for Child Life Society, an organization helping
children and the families of children with Cystic Fibrosis. Additionally, he has been instrumental in developing, opening and
managing a community center in his home town of Brooklyn, New York.
We
believe that Mr. Ralbag’s experience in the financial services industry will provide value to us as we determine how to
meet our future capital requirements, leading us to believe that he should serve as a director.
Carl J. Schramm
Carl
J. Schramm has served as a director since November 9, 2016. Dr. Schramm is University Professor at Syracuse University and former
president of the Ewing Marion Kauffman Foundation. The Kauffman Foundation is the world’s largest philanthropy dedicated
to promoting entrepreneurship.
Dr.
Schramm is recognized internationally as a leading authority on innovation, entrepreneurship and economic growth. The Economist
has referred to Dr. Schramm as the “evangelist of entrepreneurship.” In 2007 Schramm, and then British Prime Minister
Gordon Brown, created Global Entrepreneurship Week, now observed in 165 countries. His 2010 essay in Foreign Affairs initiated
the study of expeditionary economics.
Dr. Schramm’s academic career began at Johns Hopkins, where he founded the nation’s first
research center on healthcare finance. He has founded or co-founded five companies, including HCIA and Greenspring Advisors. Dr.
Schramm also has served in major corporate roles including Executive Vice President of Fortis (now Assurant) and CEO of Fortis
Healthcare. He has advised major corporations including Ford, Johnson & Johnson, Apple, and numerous health insurance companies.
He has been a member of the Singapore Prime Minister’s Research, Innovation, and Enterprise Council. He chaired the U.S.
Department of Commerce’s Measuring Innovation in the 21st Century Economy Advisory Committee during the Bush Administration
and was a member of President Obama’s National Advisory Council on Innovation and Entrepreneurship. Dr. Schramm is a trustee
of the Templeton World Charity Foundation; a founding member of the Board of the International Intellectual Property Commercialization
Council, a U.N. recognized NGO, headquartered in Hong Kong; and, a Council Member of the National Academies of Sciences’
Government-University-Industry Research Roundtable. He also serves on the board of the Tusher Center for Intellectual Property
at UC Berkeley. He has authored, coauthored, or edited several books including Better Capitalism; Good Capitalism/Bad Capitalism;
Inside Real Innovation; The Entrepreneurial Imperative, and Controlling Healthcare Costs. Burn The Business Plan is forthcoming
in
2018.
Dr.
Schramm is a Batten Fellow at the University of Virginia and has served as a visiting scientist at MIT. He was the inaugural Arthur
& Carlyse Ciocca Visiting Professor of Innovation and Entrepreneurship at UC Davis in the academic years 2013 and 2014. Dr.
Schramm holds a Ph.D. in economics from Wisconsin where he was a Ford Foundation Fellow and a New York State Regents Graduate
Fellow, and earned his law degree at Georgetown. He held two consecutive Career Scientist Awards from NIH, and was a Robert Wood
Johnson Foundation Health Policy Fellow at the National Academy of Medicine. He holds five honorary degrees and the University
of Rochester’s George Eastman Medal. He is a member of the Council on Foreign Relations and a Fellow of the Royal Society
of Arts.
Dr.
Schramm’s extensive education, academic career and research experience led us to believe that he should serve as a director.
Arrangements for Service and Family
Relationships
No
family relationship exists among any of the directors or executive officers. With the exception of Theodore Farnsworth, who we
agreed to appoint as Chairman of the Board and Chief Executive Officer of Zone pursuant to the Agreement and Plan of Merger, dated
as of July 7, 2016, among the Company, Zone Acquisition Corp. and Zone Technologies, Inc., no arrangement or understanding exists
between any director and any other person pursuant to which a director was selected as a director of the Company and no arrangement
or understanding exists between any executive officer and any other person pursuant to which an executive officer was selected
as an executive officer of the Company.
Section 16(a) Beneficial Ownership
Reporting Compliance
Section
16(a) of the Exchange Act requires the Company's directors, executive officers and certain beneficial owners of the Company's
equity securities (the “Section 16 Reporting Persons”) to file with the SEC reports regarding their ownership and
changes in ownership of the Company’s equity securities. Based on a review of Forms 3, 4 and 5 and any amendments thereto,
we believe that each of the Section 16 Reporting Persons reported on a timely basis all transactions required to be reported by
Section 16(a) during the year ended December 31, 2017, except for the following:
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●
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Carl J.
Schramm has not filed a Form 3 since his appointment to the Company’s Board.
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Audit Committee
The
Board has an Audit Committee which is comprised of Messrs. Schramm, Singh (Chairperson) and Ralbag. In connection with the review
of this report, including our financial statements, the Board determined that due to the complexity of the accounting issues related
to the sale and issuance of our Senior Secured Convertible Notes, the Audit Committee no longer had an Audit Committee Financial
Expert. No member of the Audit Committee has experience preparing, auditing, analyzing or evaluating financial statements that
present the breadth and level of complexity of accounting issues that are raised by the Senior Secured Convertible Notes. The
Board intends to actively search for an independent director who will have the qualifications of an Audit Committee Financial
Expert. The Audit Committee Charter is posted at the Company’s website, www.hmny.com, under “Our Team”.
Director Nomination Process
There
have been no material changes to the procedures by which security holders may recommend nominees to the Board’s Nominating
and Corporate Governance Committee.
Code of Business Conduct and Ethics
The
Board has adopted a code of ethics designed, in part, to deter wrongdoing and to promote honest and ethical conduct, including
the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, full, fair,
accurate, timely and understandable disclosure in reports and documents that the Company files with or submits to the Commission
and in the Company’s other public communications, compliance with applicable governmental laws, rules and regulations, the
prompt internal reporting of violations of the code to an appropriate person or persons, as identified in the code, and accountability
for adherence to the code. The code of ethics applies to all directors, executive officers and employees of the Company. The Company
will provide a copy of the code to any person without charge, upon request to Ms. Jeannie Lasek, Human Resources Generalist by
calling (212) 979-8228 or by writing to Helios and Matheson Analytics Inc., Empire State Building, 350 Fifth Avenue, Suite 7520,
New York, NY 10118, Attention: Ms. Jeannie Lasek.
The
Company intends to disclose any amendments to or waivers of its code of ethics as it applies to directors or executive officers
by filing them on Form 8-Ks.
ITEM 11. EXECUTIVE
COMPENSATION
Summary Compensation
Table for 2017 and 2016
Set forth in the
table below is the compensation paid to our executive officers during the years ended December 31, 2017 and 2016.
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Stock
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All Other
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Salary
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Bonus
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Awards
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)(1)
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($)(2)
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($)
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($)
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Theodore Farnsworth
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2017
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225,000
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1,350,000
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7,250,000
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76,050
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(3)
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8,901,050
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Chief Executive Officer
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2016
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32,500
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176,400
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208,900
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Parthasarathy Krishnan
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2017
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225,000
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500
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2,685,000
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7,244
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(5)
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2,917,744
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Chief Innovation Officer (4)
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2016
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131,250
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-
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-
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-
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131,250
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Stuart Benson
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2017
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200,000
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35,500
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-
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-
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235,500
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Chief Financial Officer
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2016
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22,052
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-
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-
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-
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22,052
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(1) Amounts for
this column reflect (i) a cash bonus awarded to Mr. Farnsworth in accordance with the terms of his employment agreement and (ii)
discretionary bonuses awarded to Mr. Krishnan and Mr. Benson.
(2) The amounts
for 2017 reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. Assumptions used in the calculation
of these amounts are included in Note 13 to our audited consolidated financial statements for the fiscal year ended December 31,
2017, included in this Annual Report. The amounts in this column exclude an aggregate of 2,053,255 shares awarded to Mr. Farnsworth
in consideration for entry into, and as a bonus under, his employment agreement in 2017, which award is subject to stockholder
approval and which shares have not yet been granted.
(3) Consists of
payment of housing expenses.
(4) The Company’s
Board of Directors determined on and as of November 2, 2017 that Mr. Krishnan was no longer a named executive officer of the Company.
(5) Consists of
payment of 2016 compensation in arrears which was discovered by the Company in the first quarter of 2017.
Option Exercises
for 2017
No
options were exercised by the named executive officers during 2017.
Outstanding Equity Awards at 2017
Fiscal Year End
The
named executive officers did not hold unvested equity compensation awards as of December 31, 2017.
Employment Agreements
Farnsworth
Agreement
On
December 11, 2017 (the “Farnsworth Agreement Date”), we entered into an employment agreement (the “Farnsworth
Agreement”) with Theodore Farnsworth, our Chief Executive Officer and Chairman of the Board. The Farnsworth Agreement has
an initial term of five years and, following the expiration of the initial term, will be automatically renewed for additional
consecutive terms of one year, unless either we or Mr. Farnsworth objects to the renewal upon at least ninety days prior to the
commencement of the renewal term.
Compensation
Each
grant of common stock discussed below is subject to approval by our stockholders to the extent required by the Listing Rules of
The Nasdaq Stock Market, including Listing Rule 5635(c). The Company anticipates seeking such stockholder approval during the
first half of 2018.
Base
Salary.
Pursuant to the Farnsworth Agreement, Mr. Farnsworth’s base salary will be $325,000 per year and will be increased
on each anniversary of the Farnsworth Agreement Date in an amount to be determined by the Board, but in no event less than $15,000.
Annual
Bonus.
For 2017, Mr. Farnsworth will receive a year-end cash bonus in the amount of $350,000 and an award of 53,255 shares
of the Company’s common stock which shall vest on February 15, 2019, which have a value of $450,000, as determined by the
last closing price of the common stock preceding the grant date (December 10, 2017). For each subsequent year of the term, Mr.
Farnsworth will receive an annual bonus, made up of cash and shares of our common stock, as determined in the sole discretion
of the Board based on its assessment of our Company and individual performance in relation to performance targets, a subjective
evaluation of Mr. Farnsworth’s performance or such other criteria as may be established by the Board. The annual cash target
bonus will be 25% of Mr. Farnsworth’s base salary and the annual award of shares of the Company’s common stock will
have a value equal to 200% of his base salary, also determined by the closing price of the common stock on the grant date. Shares
of common stock granted to Mr. Farnsworth in each subsequent year of the term will vest ratably at the end of each of the six
calendar quarters subsequent to the calendar quarter in which the grant is made.
Market
Capitalization Milestone Bonus.
Mr. Farnsworth will receive a stock bonus based upon the Company’s achievement of certain
market capitalization milestones during the term of the agreement, as set forth in the table below. Each award of common stock
pursuant to a market capitalization milestone will vest upon the later of February 15, 2019 and the end of the applicable three-month
period following the applicable date of the grant. The Company’s market capitalization for each applicable milestone and
measurement period will be determined based on the market capitalization reported by Bloomberg LP.
Company
Market Capitalization
Milestone
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Percentage
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$100,000,000
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3%
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$150,000,000
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3%
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$200,000,000
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4%
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$250,000,000
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4%
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$300,000,000
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5%
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$350,000,000
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5%
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$400,000,000
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7%
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$450,000,000
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7%
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$500,000,000
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9%
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every additional $100,000,000
thereafter (cumulated with the applicable immediately preceding milestone)
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10%
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Each
milestone above is a separate milestone for which Mr. Farnsworth may earn the applicable percentage. Mr. Farnsworth will be entitled
to earn the applicable percentage for each milestone only once.
Capital
Raise Bonus.
Mr. Farnsworth will receive a one-time bonus of $1,000,000, payable no later than December 29, 2017, for his
efforts in bringing capital sources that have been critical to the Company’s needs during 2017.
Grant
of Common Stock.
In approving the Farnsworth Agreement, the Board approved the issuance of 2,000,000 shares of common stock
to Mr. Farnsworth, which have a market value of $16,900,000 based on the last closing price of the common stock preceding the
grant date (December 10, 2017). The shares will vest in their entirety on February 15, 2019, which is 18 months following August
15, 2017, the date on which the Company entered into the MoviePass SPA. Pursuant to the terms of the MoviePass SPA, the Company
was required to enter into a 5-year employment agreement with Mr. Farnsworth prior to the closing of the MoviePass Transaction,
which occurred on December 11, 2017.
Other Benefits
Life
Insurance.
We will pay the premiums of an insurance policy insuring Mr. Farnsworth’s life, providing coverage in the
amount of $3,000,000, payable to a beneficiary chosen by Mr. Farnsworth.
Automobile
Allowance.
Mr. Farnsworth will receive an automobile allowance of $750 per month.
Company
Benefits.
Mr. Farnsworth will be entitled to participate in all pension, savings and retirement plans, welfare and insurance
plans, practices, policies, programs and perquisites of employment applicable generally to other senior executives of the Company.
Termination
Provisions
We
may terminate the Farnsworth Agreement as a result of the death or disability of Mr. Farnsworth or for “cause” as
defined in the Farnsworth Agreement. Mr. Farnsworth may terminate the Farnsworth Agreement upon 30 days’ notice to us or
for “good reason,” as defined in the Farnsworth Agreement. If the Farnsworth Agreement is terminated by Mr. Farnsworth
for any reason other than good reason, terminated by us for cause, or expires by its terms, Mr. Farnsworth will receive earned
but unpaid base salary, unpaid expense reimbursements, any earned but unpaid annual bonus, and the value of any accrued and unused
vacation days (collectively, the “Accrued Obligations”).
If
the Farnsworth Agreement is terminated due to his death or disability, Mr. Farnsworth will receive the Accrued Obligations; a
pro-rata portion of the annual bonus, if any, for the fiscal year in which the termination occurs; accelerated vesting of any
equity-incentive awards; reimbursement of health insurance premiums, for himself or his dependents in the event of his death,
for a period of 18 months; and, in the event of his disability, continuation of the base salary until the earlier of (A) the 12
month anniversary of the termination date of his employment and (B) the date Mr. Farnsworth is eligible to commence receiving
payments under our long-term disability policy.
If
Mr. Farnsworth’s employment is terminated due to a Change in Control, as defined in the Farnsworth Agreement, without cause
by us or for good reason by Mr. Farnsworth, he will receive the Accrued Obligations; severance in a single lump sum installment
in an amount equal to 2 times the sum of (A) the base salary plus (B) an amount equal to 2 times the maximum annual bonus for
which he is eligible in the fiscal year in which the termination of his employment occurs, or if there is no annual bonus for
which he is eligible in that year, then 2 times the annual bonus most recently paid to him; a pro-rata portion of the annual bonus,
if any, for the fiscal year in which the termination occurs; accelerated vesting of any equity-incentive awards; and reimbursement
of health insurance premiums for a period of 18 months.
If,
as of the date of a Change in Control, Mr. Farnsworth holds equity awards that are not vested and, if applicable, exercisable,
such equity awards will become fully vested and, if applicable, exercisable, as of the date of the Change in Control if the acquirer
does not agree to assume the awards or substitute equivalent equity awards.
The
Farnsworth Agreement includes standard provisions relating to maintaining the confidentiality of our confidential information,
non-solicitation of our employees and indemnification.
Benson
Agreement
On
January 18, 2018, we entered into an employment agreement (the “Benson Agreement”) with Stuart Benson, our Chief Financial
Officer. The term of the Benson Agreement will expire on December 31, 2020 and, following the expiration of the initial term,
will be automatically renewed for additional consecutive terms of one year, unless either we or Mr. Benson objects to the renewal
at least ninety days prior to the commencement of the renewal term.
Compensation
Base
Salary.
Pursuant to the Benson Agreement, Mr. Benson’s base salary will be $275,000 per year, retroactive to January
1, 2018, and will be increased on the first day of each calendar year thereafter in an amount that is no less than 7% of the base
salary.
Annual
Bonus.
For 2017, Mr. Benson will receive a performance bonus consisting of (i) cash in the amount of $150,000, payable no
later than January 31, 2018; (ii) 300,000 shares of the Company’s common stock for extraordinary services related to the
Company’s acquisition of a majority stake in MoviePass Inc.; and (iii) 100,000 shares of the Company’s common stock
for outstanding performance of his general duties in 2017. The shares of common stock will vest in their entirety on February
15, 2019 and will be issued no later than March 15, 2018. For each subsequent year of the term, Mr. Benson may receive an annual
bonus, made up of cash and shares of the Company’s common stock, as determined in the sole discretion of the Board based
on its assessment of Company and individual performance in relation to performance targets, a subjective evaluation of Mr. Benson’s
performance or such other criteria as may be established by the Board. The annual cash target bonus will be 50% of Mr. Benson’s
base salary and, if granted, the annual award of shares of the Company’s common stock will be as follows: (i) for services
rendered during 2018, 300,000 shares; (ii) for services rendered during 2019, 325,000 shares; and (iii) for services rendered
during 2020, 400,000 shares. The shares of common stock included in the annual bonus, if any, will vest ratably at the end of
each of the six calendar quarters subsequent to the calendar quarter in which the grant is made. Any award of common stock made
pursuant to the Benson Agreement will be subject to our receipt of all corporate approvals required by applicable law or the rules
and regulations of the Nasdaq Capital Market or such other national securities exchange in the United States on which our common
stock is then listed and the terms of an award agreement between Mr. Benson and the Company.
Grant
of Common Stock.
We will grant to Mr. Benson an award of 600,000 shares of common stock, subject to the terms of an award
agreement. The shares shall vest in their entirety on February 15, 2019, eighteen months following August 15, 2017, the date on
which we entered into the MoviePass SPA, which contemplated that we would enter into an employment agreement with Mr. Benson prior
to the closing under the MoviePass Transaction.
Other Benefits
Life
Insurance.
We will pay the premiums of an insurance policy insuring Mr. Benson’s life, providing coverage in the amount
of $3,000,000, payable to a beneficiary chosen by Mr. Benson.
Automobile
Allowance.
Mr. Benson will receive an automobile allowance of $750 per month.
Company
Benefits.
Mr. Benson will be entitled to participate in all pension, savings and retirement plans, welfare and insurance plans,
practices, policies, programs and perquisites of employment applicable generally to other senior executives of the Company.
Termination Provisions
We
may terminate the Benson Agreement as a result of the death or disability, as defined in the Benson Agreement, of Mr. Benson or
for “cause” as defined in the Benson Agreement. Mr. Benson may terminate the Benson Agreement upon 30 days’
notice to the Company or for “good reason,” as defined in the Benson Agreement. If the Benson Agreement is terminated
by Mr. Benson for any reason other than good reason, terminated by the Company for cause, or expires by its terms, Mr. Benson
will receive earned but unpaid base salary, unpaid expense reimbursements, any earned but unpaid annual bonus, and the value of
any accrued and unused vacation days (collectively, the “Accrued Obligations”).
If
the Benson Agreement is terminated due to his death or disability, Mr. Benson will receive the Accrued Obligations; a pro-rata
portion of the annual bonus, if any, for the fiscal year in which the termination occurs; accelerated vesting of any equity-incentive
awards that are subject to time-based vesting; subject to a valid election under the Consolidated Omnibus Budget Reconciliation
Act of 1985, as amended (“COBRA”), reimbursement of health insurance premiums, for himself or his dependents in the
event of his death, for a period of 18 months; and, in the event of his disability, continuation of the base salary until the
earlier of (A) the 12 month anniversary of the termination date of his employment and (B) the date Mr. Benson is eligible to commence
receiving payments under our long-term disability policy.
If
Mr. Benson’s employment is terminated without cause by us, due to a Change in Control, as defined in the Benson Agreement,
or for good reason by Mr. Benson, he will receive the Accrued Obligations; severance in a single lump sum installment in an amount
equal to 2 times the sum of (A) the base salary plus (B) an amount equal to 2 times the maximum annual bonus for which he is eligible
in the fiscal year in which the termination of his employment occurs, or if there is no annual bonus for which he is eligible
in that year, then 2 times the annual bonus most recently paid to him; a pro-rata portion of the annual bonus, if any, for the
fiscal year in which the termination occurs; accelerated vesting of any equity-incentive awards; and subject to a valid election
under COBRA, reimbursement of health insurance premiums for a period of 18 months.
If,
as of the date of a Change in Control, Mr. Benson holds stock options that are not vested and exercisable, such stock options
will become fully vested and exercisable, as of the date of the Change in Control if the acquirer does not agree to assume the
awards or substitute equivalent stock options.
The
Benson Agreement includes standard provisions relating to maintaining the confidentiality of the Company’s confidential
information, non-solicitation of the Company’s employees and indemnification.
On
April 7, 2016 we entered into an at-will employment agreement with Pat Krishnan (the “Krishnan Agreement”) whereby,
in exchange for his services as Chief Executive Officer, President and Interim Chief Financial Officer, we agreed to pay him compensation
of $175,000 a year. On November 9, 2016, Mr. Krishnan’s annual compensation was increased to $225,000. Pursuant to the Krishnan
Agreement, Mr. Krishnan must provide us with at least 10 days’ notice before terminating his employment. The Krishnan Agreement
also includes a confidentiality provision and non-compete and non-solicitation provisions that continue for a period of one year
following his separation from service. Mr. Krishnan resigned his positions as Chief Executive Officer, President and Interim Chief
Financial Officer on January 20, 2017, when he was appointed as our Chief Innovation Officer.
Director Compensatio
n
The
following table sets forth certain information regarding compensation for services rendered by our non-employee directors during
the year ended December 31, 2017. Our directors are paid $7,500 for each full quarter during which they provide services to us.
Reimbursable expenses such as travel-related expenses are not included in the table below.
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Fees Earned
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All
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Or paid in
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Stock
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Other
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cash
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Awards
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Compensation
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Total
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Name
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($)(1)
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($)(2)
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($)(3)
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($)
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Prathap Singh
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30,000
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-
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30,000
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Muralikrishna Gadiyaram
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-
|
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7,250,000
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206,250
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7,456,250
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Carl J. Schramm
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34,321
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-
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34,321
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Gavriel Ralbag
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30,000
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-
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30,0001
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(1)
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Represents fees earned or paid
in cash in 2017, including annual retainer fees, committee fees and fees for special
Board or committee projects.
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(2)
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The amounts reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.
Assumptions used in the calculation of these amounts are included in Note 14 to our audited consolidated financial statements for
the fiscal year ended December 31, 2017, included in this Annual Report. The amount in this column exclude 40,000 shares awarded
to each director during the year ended December 31, 2017 under the Company’s 2014 Equity Incentive Plan. The award of such
shares is subject to the entry into applicable award agreements, and accordingly the shares were not granted in fiscal 2017.
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(3)
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Consists of consultant fees.
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ITEM 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The
following table sets forth the number of shares of common stock beneficially owned as of April 11, 2018 by:
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each
person known by the Company to own beneficially more than 5% of the Company’s common
stock
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·
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each
of the Company’s directors and named executive officers listed in the Summary Compensation
Table under the section entitled “Executive Compensation”; and
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·
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all
of our current executive officers and directors as a group.
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Name of Beneficial Owner(1)
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|
Amount and
Nature of
Beneficial
Ownership (2)
|
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Percentage of
Ownership (3)
|
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5% Stockholders
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Hudson Bay Capital Management, L.P (4)
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5,642,99
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(5)
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9.6
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%
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Sander Gerber (4)
|
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5,642,991
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(5)
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9.6
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%
|
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|
|
|
|
|
|
|
|
Named Executive Officers and Directors
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|
|
|
|
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Theodore Farnsworth
|
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|
5,416,355
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(6)
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9.6
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%
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Stuart Benson
|
|
|
1,000,000
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(7)
|
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|
1.9
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%
|
Muralikrishna Gadiyaram
|
|
|
2,323,040
|
(8)
|
|
|
4.4
|
%
|
Prathap Singh
|
|
|
40,000
|
(9)
|
|
|
*
|
|
Gavriel Ralbag
|
|
|
40,000
|
(10)
|
|
|
*
|
|
Carl J. Schramm
|
|
|
40,000
|
(11)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All current directors and executive officers as a group (6 persons)
|
|
|
8,859,395
|
(12)
|
|
|
15.3
|
%
|
*Less than 1%
|
(1)
|
Unless otherwise noted, the business
address of each named person is c/o Helios and Matheson Analytics Inc., Empire State
Building, 350 Fifth Avenue, Suite # 7520, New York, New York 10118.
|
|
(2)
|
Unless otherwise noted, each
person named in the table below has sole voting and investment power with regard to all
shares beneficially owned, subject to applicable community property laws.
|
|
(3)
|
The percentages
shown are calculated based on 52,996,631 shares of common stock issued and outstanding
on April 11, 2018. In calculating the percentage of ownership, all shares of common stock
that are acquirable by the identified person or group within 60 days of April 11, 2018
are deemed to be outstanding for purposes of computing the percentage of the shares of
common stock owned by that person or group, but are not deemed to be outstanding for
the purpose of computing the percentage of the shares of common stock owned by any other
person or group.
|
|
(4)
|
Mr. Gerber serves
as the managing member of Hudson Bay Capital GP LLC, which is the general partner of
Hudson Bay Capital Management, L.P. The address for Hudson Bay Capital Management, L.P.
(“Hudson Bay”) and Mr. Gerber is 777 Third Avenue, 30th Floor, New York,
New York 10017.
|
|
(5)
|
According to the Company’s
records, and based on information provided by Hudson Bay as of April 11, 2018, these
shares represent shares reserved for issuance to Hudson Bay and shares issuable upon
exercise of warrants, and are each subject to a 9.99% blocker.
|
|
(6)
|
This amount includes (i) 750,000
shares issuable within 60 days of April 11, 2018, subject to entry into applicable award
agreements, (ii) 2,926,355 shares issuable within 60 days of April 11, 2018 subject to
stockholder approval.
|
|
(7)
|
Represents shares
issuable within 60 days of April 11, 2018, subject to stockholder approval.
|
|
(8)
|
Includes (i) 687,149
shares held by Helios & Matheson Information Technology Ltd. and (ii) 885,891 shares
held by Helios Matheson Inc., over which Mr. Gadiyaram holds shared voting and investment
control.
|
|
(9)
|
Represents shares issuable within
60 days of April 11, 2018.
|
|
(10)
|
Represents shares
issuable within 60 days of April 11, 2018.
|
|
(11)
|
Represents shares
issuable within 60 days of April 11, 2018.
|
|
(12)
|
Includes an aggregate
amount of 5,153,364 shares issuable within 60 days of April 11, 2018.
|
The Helios and Matheson Analytics
Inc. 2014 Equity Incentive Plan
On
March 3, 2014 our Board approved and adopted, and on May 5, 2014 our stockholders approved, the Helios and Matheson Analytics
Inc. 2014 Equity Incentive Plan (the “2014 Plan”) which initially set aside and reserved 400,000 shares of the Company’s
common stock for grant and issuance under the 2014 Plan, in accordance with its terms and conditions. In conjunction with the
merger with Zone, the number of shares reserved for the 2014 Plan was increased by 725,000 shares of common stock. In January
2018, our Board approved and adopted, and on February 5, 2018, our stockholders approved, an increase in the number of shares
reserved for the 2014 Plan by 1,875,000, so that the total shares set aside and reserved for issuance under the 2014 Plan totals
3,000,000 shares (the “Shares”). Persons eligible to receive awards from the 2014 Plan include employees (including
officers and directors) of the Company and its affiliates, consultants who provide significant services to the Company or its
affiliates, and directors who are not employees of the Company or its affiliates (collectively, the “Participants”).
The 2014 Plan permits the Company to issue to Participants qualified and/or non-qualified options to purchase the Company’s
common stock, restricted common stock, performance units (comprised of, for example, common stock and an option to purchase common
stock) and performance shares. The 2014 Plan will terminate on March 3, 2024. The Compensation Committee of the Board has been
appointed as the committee responsible for administration of the 2014 Plan and has the sole discretion to determine which Participants
will be granted awards and the terms and conditions of the awards granted. The 2014 Plan may be amended by the Board.
The
exercise price of options granted from the 2014 Plan will be the fair market value of our common stock, defined in the 2014 Plan
as the last quoted sales price on the date of grant, unless the option is designated as an incentive stock option and the Participant
owns securities representing more than 10% of the voting power outstanding (a “10% Holder”), in which case the exercise
price will be 110% of the fair market value. No option can have a term that is longer than 10 years; an incentive stock option
granted to a 10% Holder cannot have a term that is longer than 5 years. Following the termination of a Participant’s employment
for a reason other than death or disability, an outstanding option will terminate three months following the Participant’s
separation from service. If a Participant’s employment is terminated as a result of death or disability, an outstanding
option will terminate one year following the Participant’s separation from service. Upon the exercise of any option, the
exercise price will be payable to us in full in cash or its equivalent. The Compensation Committee, in its sole discretion, also
may permit exercise (i) by tendering previously acquired shares of our common stock, owned for more than six months, having an
aggregate fair market value at the time of exercise equal to the total exercise price or (ii) by any other means which the Compensation
Committee, in its sole discretion, determines to both provide legal consideration for the common stock, and to be consistent with
the purposes of the 2014 Plan.
Individual Employee Benefit Plans
On
January 20, 2017, the Board approved individual employee benefit plans (the “Executive Plans”) for Theodore Farnsworth,
Pat Krishnan and Muralikrishna Gadiyaram. Pursuant to the Executive Plans, upon stockholder approval of the Executive Plans becoming
effective, the Company will issue 250,000 unregistered shares of common stock to each of the above-named individuals as a bonus
for exceptional services provided in connection with the Company’s merger transaction with Zone. The Executive Plans each
include a provision that prevents the sale or transfer of the shares, subject to exceptions for the transfer by gift, by will
or intestate succession, or to a trust for the benefit of the individual or his family, for a period of 24 months from the date
that stockholder approval is obtained. Subject to the requirements of the Company’s insider trading policy, the shares may
also be sold or transferred in connection with the full or partial payment of taxes or tax withholding obligations required to
be paid or satisfied upon the individual’s receipt of the shares. The Executive Plans also include a market standoff provision
which prevents the recipient from selling or transferring the shares for a period not to exceed 180 days from the consummation
of a registered offering if so requested by the underwriter or placement agent. Stockholder approval for the grants was obtained
at a special meeting of our stockholders held on October 27, 2017.
Also
on January 20, 2017 the Board approved individual employee benefit plans (the “January Consultant Plans”) for two
consultants. Pursuant to the January Consultant Plans, each of the consultants received 200,000 unregistered shares of the Company’s
common stock as a bonus for exceptional services provided in connection with the Company’s merger transaction with Zone.
The January Consultant Plans were also approved by the Company’s stockholders on January 22, 2017.
On
August 10, 2017, the Board approved individual employee benefit plans for various consultants of the Company, granting such consultants
an aggregate of 238,333
shares for various services provided to the Company.
|
|
Number of Securities to
|
|
|
Weighted-average
|
|
|
|
|
|
|
be issued upon exercise
|
|
|
exercise price of
|
|
|
|
|
|
|
of outstanding options,
|
|
|
outstanding options,
|
|
|
|
|
Plan Category
|
|
warrants and
rights
|
|
|
warrants and
rights
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
885,000
|
|
Equity compensation plans not approved by security holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
885,000
|
|
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Independence of Directors
Upon
consideration of the criteria and requirements regarding director independence set forth in NASDAQ Rule 5605, the Board of Directors
has determined that the following three directors, Messrs. Ralbag, Schramm and Singh, meet NASDAQ’s independence standards.
Transactions with Related Persons,
Promoters and Certain Control Persons
Other
than as disclosed below, during our last two fiscal years through the date of this report, there has not been any transaction
or series of similar transactions to which we were or will be a party in which the amount involved exceeded or will exceed the
lesser of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years ($87.8
million) and in which any of our directors, nominees for director, executive officers, holders of more than five percent of any
class of our voting securities or any member of the immediate family of the foregoing persons had or will have a direct or indirect
material interest.
Gadiyaram Consulting
Agreement
On
October 5, 2017, we entered into a consulting agreement (the “Consulting Agreement”) with Mr. Muralikrishna Gadiyaram,
a director of the Company. The Consulting Agreement formalizes the consulting arrangement between us and Mr. Gadiyaram, for which
we have been accruing consulting fees since January 1, 2017. Mr. Gadiyaram has been providing consulting services without an agreement
or compensation since our acquisition of Zone in November 2016. Pursuant to the Consulting Agreement, Mr. Gadiyaram will continue
providing guidance to the Company and Zone relating to the further development of their respective businesses and technologies,
including, without limitation, rolling-out the RedZone Map application outside the United States, particularly in India. If requested
by the Company, Mr. Gadiyaram will also provide guidance with respect to the development of any businesses or technologies that
the Company or Zone may acquire during the term of the Consulting Agreement, including, without limitation, MoviePass. In exchange
for his services, Mr. Gadiyaram will receive fees in the amount of $18,750 per month in cash. Following our execution of the Consulting
Agreement, pursuant to its terms, we paid Mr. Gadiyaram the accrued consulting fees for the period from January 1, 2017 through
June 30, 2017, which did not become due or owing until the execution of the Consulting Agreement. The Consulting Agreement has
a term of two years but may be terminated by either party at any time by giving 30 days written notice to the other party. If
we terminate the Consulting Agreement without Cause, as defined in the Consulting Agreement, prior to the end of the term, Mr.
Gadiyaram will be entitled to a termination fee equal to the lesser of (a) the consulting fee for the remainder of the term, or
(b) the consulting fee for a period of 12 months following the delivery of written notice of termination by the Company, in each
case payable monthly and subject to proration.
Adoption of Executive Plans
The
Board has approved individual employee benefit plans (the “Executive Plans”) for three of our executives, Theodore
Farnsworth, Parthasarathy (Pat) Krishnan and Muralikrishna Gadiyaram (the “Executives”). There are no other executive
officers or directors that will participate in the Executive Plans. Each of the Executive Plans includes the following:
|
●
|
A grant of 250,000 unregistered
shares of our common stock (the “Award Shares”) to each Executive, which
grant was subject to (i) approval by The Nasdaq Stock Market LLC of a listing of additional
shares form, which form was submitted to Nasdaq on January 24, 2017 and approved January
31, 2017 and (ii) approval by our stockholders, which took place at a special meeting
of our stockholders on October 27, 2017;
|
|
●
|
A grant
of 500,000 unregistered shares of our common stock (the “MP Award Shares”)
to each Mr. Farnsworth and Mr. Gadiyram, which grant was subject to (i) approval by The
Nasdaq Stock Market LLC and (ii) approval by our stockholders, which took place at a
special meeting of our stockholders on October 27, 2017;
|
|
●
|
A lock-up
provision preventing the sale or transfer of the Award Shares for a period of 24 months
from the date that stockholder approval was obtained subject to exceptions for (i) the
transfer of Award Shares as a bona fide gift, by will or intestate succession or to a
trust for the benefit of the Executive and his immediate family and (ii) the transfer
of Award Shares to us or any deemed disposition or deemed sale with respect to the Award
Shares in connection with the full or partial payment of taxes or tax withholding obligations
required to be paid or satisfied upon receipt by the Executive of the Award Shares;
|
|
●
|
A lock-up
provision preventing the sale or transfer of the MP Award Shares for a period of 18 months
from the date of the closing of the Company’s acquisition of a majority of MoviePass;
and
|
|
●
|
A “market
standoff” provision pursuant to which the Executive agrees that, following the
execution of a definitive underwriting or placement agency agreement with respect to
a registered offering of our securities, the Executive will not sell or otherwise transfer
any Award Shares or other securities of the Company during any period, not to exceed
180 days, requested by the underwriter or placement agent and agreed to in writing by
us.
|
The
shares under the Executive Plans reserved for issuance to Mr. Gadiyaram were issued in February 2018. Other than the shares issued
to Mr. Gadiyaram, as of the date of this report, none of the shares of common stock granted pursuant to the Executive Plans has
been issued.
Transactions with Helios and Matheson
Information Technology Ltd. (“HMIT”)
In
September 2010, the Company entered into an amendment of a Memorandum of Understanding (the “MOU”) with its former
parent, HMIT, which was subsequently amended in August 2013. Pursuant to the MOU, HMIT agreed to make available to the Company
facilities of dedicated Off-shore Development Centers (“ODCs”) and also render services by way of support in technology,
client engagement, and management and operation of the ODCs for the Company. The Company furnished HMIT with a security deposit
of $2,000,000 to cover any expenses, claims or damages that HMIT may have incurred while discharging its obligations under the
MOU and also to cover the Company’s payable to HMIT. As of December 31, 2015, the Company had a receivable from HMIT in
the amount of $182,626 which represents amounts paid on behalf of HMIT, for which the Company fully reserved.
In
August 2014, the Company entered into a Professional Service Agreement with HMIT (the “PSA”), which documented ongoing
services provided by HMIT from February 24, 2014. Pursuant to the PSA, HMIT hired employees in India and provided infrastructure
services for those employees to facilitate the operations of those of the Company’s clients who needed offshore support
for their businesses. For the services the Company paid the costs incurred by HMIT for the employees it hired to provide the services
and a fixed fee for infrastructure support. Beginning October 2014, all employees were transferred to the payroll of the Company’s
subsidiary, Helios and Matheson Global Services Pvt. Ltd., and HMIT was paid only for the infrastructure support it provided until
August 2015. Beginning September 2015, Helios and Matheson Global Services Pvt. Ltd. leased an office and took over infrastructure
support from HMIT. For the year ended December 31, 2017 and 2016 the Company did not have any revenue from services provided with
offshore support of HMIT.
HMIT
ceased providing services under the MOU and PSA during the third quarter of 2015. The Company ensured continued uninterrupted
services to its clients by taking on infrastructure costs relating to the lease and employees.
The
Company determined to provide for a reserve in its September 30, 2015 and December 31, 2015 financial statements in the amount
of $2,300,000 (the “Reserve Amount”) due to an uncertainty relating to the ability of HMIT to (i) return the security
deposit held by HMIT in connection with the MOU and (ii) pay approximately $344,000 in reimbursable expenses and advances pursuant
to the PSA.
On
January 21, 2016, HMIT became subject to a liquidation order by an Indian court resulting from creditors’ claims against
HMIT. On February 15, 2016, the High Court of Judicature at Madras (Civil Appellate Jurisdiction) issued an order of interim stay
of the liquidation order. HMIT continues to await a decision from the High Court of Judicature relating to this matter. If HMIT
becomes subject to liquidation, the Company would likely not be able to collect the full amount of $2,300,000 reserved in its
September 30, 2016 and December 31, 2016 financial statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES
AND SERVICES
Audit Fees
For the years ended December 31, 2017 and 2016, the aggregate fees
billed
by the Company’s principal accountant (the “Principal Accountant”) for the audit of the Company’s financial
statements for each of such years and the reviews of Company’s interim financial statements during each of such years were
$88,000 and $85,500, respectively.
Audit-Related Fees
For
the years ended December 31, 2017 and 2016, there were no fees
billed
to the Principal Accountant for audit-related services.
Tax Fees
During the years ended December 31, 2017 and 2016,
there
were no fees billed to the Principal Accountant for tax advice and tax planning services.
All Other Fees
During the years ended December 31, 2017 and 2016,
there
were no fees billed to the Principal Accountant for professional services other than audit and tax services.
Audit Committee Policies and Procedures
The
Audit Committee reviews the independence of the Company’s auditors on an annual basis and has determined that the Principal
Accountant is independent. In addition, the Audit Committee pre-approves all fees and work which is performed by the Company’s
independent auditor, including the above services and fees.
Notes to Consolidated Financial Statements
The
Company's common stock is listed on The NASDAQ Capital Market (“NASDAQ”) under the symbol “HMNY”. Our website
address is www.hmny.com. Information on our website is not a part of this report.
2.
|
Change
in Controlled Company Status
|
Prior
to the merger between the Company’s wholly-owned subsidiary, Zone Acquisition, Inc. (“Zone Acquisition”), and
Zone Technologies, Inc. (“Zone”), as described below, the Company was a controlled company as defined by Rule 5615(c)(1)
of the NASDAQ Listing Rules because Helios and Matheson Information Technology Ltd., the former parent (referred to in this report
as “HMIT”), was the beneficial owner of approximately 75% of the Company’s outstanding common stock. Upon consummation
of the merger on November 9, 2016, the Company ceased to be a controlled company under NASDAQ Listing Rule 5615(c)(1).
Acquisition
of Controlling Interest in MoviePass
On
December 11, 2017, the Company completed its acquisition of a majority interest in MoviePass Inc., a Delaware corporation (“MoviePass”)
(such acquisition, the “MoviePass Transaction”), pursuant to the previously announced Securities Purchase Agreement,
dated as of August 15, 2017, between the Company and MoviePass (as amended, the “MoviePass SPA”), and the Investment
Option Agreement, dated October 11, 2017, between the Company and MoviePass (the “MoviePass Option Agreement”).
The
Company acquired its 62.41% stake in MoviePass as it aligns with its strategy to enter and grow in the theatrical ticketing subscription
business.
At the closing of
the MoviePass Transaction (the “Closing”), MoviePass issued to the Company shares of its common stock representing
51.71% of its outstanding common stock in exchange for the following consideration: (1) a subordinated convertible promissory note
in the principal amount of $12,000,000 (the “Helios Convertible Note”), which is convertible into shares of HMNY’s
common stock, as further described below; (2) a $5,000,000 promissory note issued to MoviePass (the “Helios Note”);
and (3) the exchange of a convertible promissory note issued by MoviePass to HMNY in an aggregate principal amount of $11,500,000
(plus accrued interest thereon).
In
addition, pursuant to the terms of the Note Purchase Agreement, dated as of December 11, 2017 (the “Kelly Note Purchase
Agreement”), among the Company, MoviePass and Christopher Kelly, a director, stockholder and noteholder of MoviePass (“Kelly”),
the Company agreed to purchase from Kelly, within two business days after the Closing, MoviePass convertible promissory notes
in an aggregate principal amount of $1,000,000 (the “Kelly Notes”) for $1,000,000 in cash, which was converted into
shares of MoviePass’ common stock amounting to an additional 2% of the outstanding shares of MoviePass common stock on a
post-transaction basis pursuant to a Note Conversion Agreement entered into between the Company and MoviePass (the “Kelly
Note Conversion Agreement”).
Pursuant
to the MoviePass Option Agreement, upon the Closing, the outstanding convertible promissory notes issued by MoviePass to the Company
(each a “MoviePass Option Note”) in an aggregate principal amount of $12,150,000 as of the Closing date, as well as
additional payments to MoviePass in the amount of $7,850,000, were cancelled in exchange for additional shares of MoviePass’
common stock representing an additional 8.7% of the outstanding shares of MoviePass.
Upon
completion of the above issuances, the Company owned 62.41% of MoviePass’ issued and outstanding common stock.
Amendment
No. 2 to the MoviePass SPA and Other Ancillary Agreements
Immediately
prior to the completion of the MoviePass Transaction, the Company and MoviePass entered into a second amendment to the MoviePass
SPA (“Amendment No. 2”), pursuant to which, in lieu of issuing 4,000,001 unregistered shares of the Company’s
common stock to MoviePass at the Closing (the “Helios Shares”), the Company agreed to issue the Helios Convertible
Note to MoviePass, which will convert automatically upon the Company’s receipt of approval of its stockholders relating
to the issuance of the Helios Shares as required by and in accordance with Nasdaq Listing Rule 5635 (the “Stockholder Approval”)
into 4,000,001 unregistered shares of the Company’s common stock (the “Conversion Shares”). If MoviePass fails
to list its common stock on The NASDAQ Stock Market or the New York Stock Exchange by March 31, 2018, 666,667 of the Conversion
Shares will be subject to forfeiture by MoviePass, in the Company’s sole discretion. As of the date of the report, the Company
has not made a decision with respect to the disposition of the shares.
The
Company has valued the Helios Convertible Note as of the acquisition date including the valuation of the shares subject to forfeiture
as noted above, at the fair value on the acquisition date based on a Monte Carlo simulation. The shares subject to forfeiture
are contingent consideration and have been valued as a separate component of the Helios Convertible Note. As of the acquisition
date the Helios Convertible Note was valued at $29,000,000 and the portion of the Conversion Shares subject to the forfeiture
provision were valued at $5,152,446. All of the purchase consideration with the exception of the $1,000,000 paid for the Kelly
Notes, was retained by MoviePass. Accordingly, the value of the Helios Convertible Note, the Helios Note and the value associated
with the Conversion Shares subject to forfeiture are eliminated in consolidation for financial reporting purposes.
Goodwill recognized
as part of the MoviePass acquisition is not expected to be tax deductible. Transaction related costs associated with the MoviePass
acquisition amounted to $691,500 which is included in selling, general and administrative expenses.
The Company has determined
preliminary fair values of the assets acquired and liabilities assumed in the MoviePass acquisition. These values are subject to
change as we perform additional reviews of our assumptions utilized.
HELIOS AND MATHESON
ANALYTICS INC.
Notes to Consolidated Financial Statements
The Company has made
a provisional allocation of the purchase price of the MoviePass Transaction to the assets acquired and the liabilities assumed
as of the purchase date. The following table summarizes the provisional purchase price allocations relating to the MoviePass Transaction.
Purchase consideration:
|
|
MoviePass
|
|
Cash
|
|
$
|
32,671,792
|
|
Notes payable (includes Helios Convertible Note)
|
|
|
39,152,446
|
|
Fair value of consideration transferred
|
|
$
|
71,824,238
|
|
|
|
|
|
|
Recognized amounts of identifiable assets and liabilities acquired:
|
|
|
|
|
Cash acquired
|
|
$
|
1,106,171
|
|
Accounts receivable
|
|
|
9,669,390
|
|
Notes receivable
|
|
|
39,152,446
|
|
Investment option payment receivable
|
|
|
7,850,000
|
|
Prepaid expenses and other current assets
|
|
|
192,180
|
|
Property and equipment
|
|
|
39,320
|
|
Other assets
|
|
|
8,000
|
|
Identifiable intangible assets:
|
|
|
|
|
Tradenames and trademarks
|
|
|
19,550,000
|
|
Technology
|
|
|
3,800,000
|
|
Customer relationships
|
|
|
2,560,000
|
|
Liabilities assumed
|
|
|
(9,261,785
|
)
|
Deferred revenue
|
|
|
(38,718,397
|
)
|
Non -controlling interest
|
|
|
(43,260,264
|
)
|
Goodwill
|
|
|
79,137,177
|
|
|
|
|
|
|
Total purchase price allocation
|
|
$
|
71,824,238
|
|
The Company has not
completed the valuation studies necessary to finalize the acquisition fair values of the assets acquired and liabilities assumed
and related allocation of purchase price for MoviePass. Accordingly, the type and value of the intangible assets and deferred revenue
amounts set forth above are preliminary. Once the valuation process is finalized for MoviePass, there could be changes to the reported
values of the assets acquired and liabilities assumed, including goodwill, intangible assets and deferred revenue and those changes
could differ materially from what is presented above.
The Company determined
the provisional fair value of the acquired intangible assets through a combination of the market approach and the income approach.
The significant assumptions used in certain valuations associated with the MoviePass transaction include discount rates ranging
from 10.0% to 51.0%. In determining the value of tradenames and trademarks the Company observed royalty rates ranging from 0.0%
to 100.0%, and utilized a 1.0% rate for MoviePass’s aggregated tradenames and trademarks. Additionally, the Company observed
royalty rates related to MoviePass’s technology assets acquired ranging from 0.0% to 50.0%, and used a 1.0% royalty rate
in determining the fair value of the acquired technology. In accordance with EITF guidance, the fair value of an acquired liability
related to deferred revenue would include the direct and incremental cost of fulfilling the obligation plus a normal profit margin.
The Company utilized historical operating results in estimating the direct and incremental costs of fulfilling the acquired deferred
revenue obligations. The Company recorded an amount of $43,260,264 representing the non-controlling interest of MoviePass. The
non-controlling interest in MoviePass was determined based on the fair value of MoviePass less the amounts paid by the Company
for its 62.41% controlling interest.
The estimated useful
lives of acquired intangible assets are 7 years for tradenames and trademarks, 7 years for customer relationships, and 3 years
for technology. Acquired deferred revenue is estimated to be realized based on the length of the subscription, over 12 months from
the acquisition date.
Merger with Zone Technologies, Inc.
On November 9, 2016
(the “Closing Date”), the Company completed the merger contemplated by the Agreement and Plan of Merger, dated as of
July 7, 2016, among the Company, Zone and Zone Acquisition, as amended by the Waiver and First Amendment to Agreement and Plan
of Merger dated as of August 25, 2016 and the Acknowledgment of Satisfaction of Condition and Second Amendment to Agreement and
Plan of Merger, dated as of September 21, 2016 (collectively, the “Merger Agreement”).
On the Closing Date,
the Company issued 1,740,000 shares of its common stock as merger consideration pursuant to the Merger Agreement, which represented
an exchange ratio of 0.174 shares of the Company’s common stock for each share of Zone common stock outstanding, and Zone
Acquisition, the wholly-owned subsidiary, was merged into Zone, with Zone surviving the merger as the Company’s wholly-owned
subsidiary.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
The following table summarizes the final purchase
price allocations relating to the Zone merger.
Purchase consideration:
|
|
Zone Technologies, Inc.
|
|
Common stock (1,740,000 shares at the transaction date fair value of $5.41 per share)
|
|
|
9,413,000
|
|
Fair value of consideration transferred
|
|
$
|
9,413,000
|
|
|
|
|
|
|
Recognized amounts of identifiable assets and liabilities acquired:
|
|
|
|
|
Cash acquired
|
|
$
|
136,343
|
|
Identifiable intangible assets:
|
|
|
|
|
Tradenames and trademarks
|
|
|
1,977,000
|
|
Technology
|
|
|
4,270,000
|
|
Broker relationships
|
|
|
4,200
|
|
Liabilities assumed
|
|
|
(1,574,512
|
)
|
Goodwill
|
|
|
4,599,969
|
|
|
|
|
|
|
Total purchase price allocation
|
|
$
|
9,413,000
|
|
Supplemental
pro forma information
The unaudited pro
forma information is presented for illustrative purposes only and is not necessarily indicative of the results of operations for
future periods or the results of operations that actually would have been realized had these businesses been a single company during
the periods presented or the results that a combined company will experience after the acquisition. The unaudited pro forma information
does not give effect to the potential impact of current financial conditions, anticipated synergies, operating efficiencies or
cost savings that may or may not be associated with the transactions. The following unaudited consolidated pro forma financial
information assumes the Company’s acquisition of MoviePass had occurred on January 1, 2016 and the Zone Technologies, Inc.
acquisition as of January 1, 2016.
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
24,996,070
|
|
|
$
|
15,472,410
|
|
Net loss
|
|
$
|
(200,153,526
|
)
|
|
$
|
(15,558,382
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(195,308,218
|
)
|
|
$
|
(15,558,382
|
)
|
Net loss per share attributable to common stockholders
|
|
$
|
(23.36
|
)
|
|
$
|
(5.78
|
)
|
The
unaudited consolidated pro forma financial information has been adjusted to give effect to the pro forma events that are (1) directly
attributable to the acquisitions (2) factually supportable, and (3) expected to have a continuing impact.
4.
|
Acquisition
of Assets from Trendit Ltd.
|
On
May 25, 2017, Zone completed the acquisition of all of the assets of Trendit Ltd. (“Trendit”), an Israel-based technology
company, including certain patented technology, for cash compensation of $195,143. Zone plans to integrate the patented technology
with the Redzone Map app, in order to enable the app to track and analyze real-time crowd behavior, migration and trends. The
patented technology predicts population behavior, along with population size, origin and destination, with an accuracy rate of
85%-90%, and tracks demographic segmentation of a population using a population sample of 15%, together with anonymous cellular
signals and demographic big data.
5.
|
Licensing
Agreement with Is It You Ltd.
|
On
May 18, 2017, the Company entered into an Amended and Restated License Agreement (the “Agreement”) with Is It You
Ltd., an Israeli company (“Licensor”), which is engaged in developing and marketing software that enables face recognition
authentication and verification of users on mobile smartphones. Pursuant to the Agreement, the Company was granted a non-transferable,
non-sublicensable, non-exclusive right and license (a) to integrate the licensed software with the Company’s RedZone Map
family of products, applications, and services (the “RedZone Apps”) to create integrated service offerings that integrate
and/or incorporate the licensed software with the RedZone Apps (the “Integrated Offerings”); (b) to commercialize,
distribute, and sell the Integrated Offerings to customers worldwide; (c) to use the licensed software internally to create a
non-commercial lab/testing environment; and (d) to use the licensed software to provide maintenance and support services to customers
of the Integrated Offerings. In consideration of the license, the Company is required to pay the Licensor a one-time license fee
of $80,000 for up to 1.6 million end-user licenses. In addition, in the event that the Company exceeds 1.6 million users of the
Integrated Offerings, it will be required to pay the Licensor an additional one-time license fee of $20,000 for up to an aggregate
of 20 million end-user licenses; in the event that the Company exceeds 20 million users of the Integrated Offerings, the license
agreement provides for increases in the annual fee. To date, the number of end-user licenses has not exceeded 1.6 million.
Of
the total $80,000 due in initial one-time license fees, $40,000 has been paid and was recorded to Research and Development Expense
for the period ended December 31, 2017.
6.
|
Going
Concern Analysis
|
During
the second quarter of 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial Statements - Going Concern (Subtopic
205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
. This update provides U.S. GAAP
guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability
to continue as a going concern and about related footnote disclosures. Under this standard, the Company is required to evaluate
whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods.
In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that
could raise substantial doubt about the Company’s ability to continue as a going concern within 12 months after the Company’s
financial statements were issued (April 16, 2018). Management considered the Company’s current financial condition and liquidity
sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional
obligations due before April 16, 2019.
The Company is subject
to a number of risks similar to those of other big data technology, technology consulting companies and subscription based businesses,
including its dependence on key individuals, uncertainty of product development and generation of revenues, dependence on outside
sources of capital, risks associated with research, development, testing, and successful protection of intellectual property,
the Company’s ability to maintain and grow its subscriber base and the Company’s susceptibility to infringement on
the proprietary rights of others. The attainment of profitable operations is dependent on future events, including obtaining adequate
financing to fulfill the Company’s growth and operating activities and generating a level of revenues adequate to support
the Company’s cost structure.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
The
Company has experienced net losses and significant cash outflows from cash used in operating activities over the past years. As
of and for the year ended December 31, 2017, the Company had an accumulated deficit of $189,495,185 a net loss of $150,824,842,
and net cash used in operating activities of $27,286,382. As of and for the year ended December 31, 2016, the Company had an accumulated
deficit of $43,261,418, a net loss of $7,381,071, and net cash used in operating activities of $2,134,313.
The Company expects
to continue to incur net losses and have significant cash outflows for at least the next twelve months. As of December 31, 2017,
the Company had cash and a working capital deficit of $24,949,393 and $107,097,249, respectively. Of the working capital deficit,
$72,123,262 pertained to warrant and derivative liabilities classified on the balance sheet within short term liabilities. Management
has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations
and concluded that, without additional funding, the Company will not have sufficient funds to meet its obligations within one year
from the date the consolidated financial statements were issued. While management plans to raise additional capital from sources
such as sales of its debt or equity securities or loans in order to meet operating cash requirements, there is no assurance that
management’s plans will be successful. The Company secured financing of $60,000,000 on January 11, 2018 which the Company
has used (i) to increase the Company’s ownership interests or other rights and interests in MoviePass; (ii) to satisfy certain
indebtedness; and (iii) for general corporate purposes and transaction expenses. The Company may also use the proceeds to make
other acquisitions. In January 2018 the Company filed a shelf registration statement on form S-3 that was declared effective by
the Securities and Exchange Commission on February 9, 2018, and that allows the Company to offer and sell up to $400,000,000 of
securities. Using the shelf registration statement, the Company completed an underwritten public offering of common stock and warrants
for gross proceeds of approximately $105 million on February 13, 2018. Provided that the Company continues to comply with the requirements
of form S-3, the Company may, in the future, complete additional offerings thereunder. The total cash received from the public
offering was $99 million.
Considering the above,
there is substantial doubt about the Company’s ability to continue as a going concern through April 16, 2019 without raising
additional funding. The accompanying consolidated financial statements have been prepared assuming that the Company will continue
as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities
in the normal course of business. A successful transition to attaining profitable operations is dependent upon achieving a level
of positive cash flows adequate to support the Company’s cost structure.
7.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation and Principles of Consolidation
The Company’s consolidated financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”). The consolidated financial statements include all accounts of the Company and its majority owned and controlled
subsidiaries. The Company consolidates entities in which it owns more than 50% of the voting common stock and controls operations.
All intercompany transactions and balances among consolidated subsidiaries have been eliminated. The Company consolidated the
operations of MoviePass as of December 11, 2017 and Zone as of November 9, 2016.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates
made by management include, but are not limited to, allowance for doubtful accounts, purchase accounting allocations,
recoverability and useful lives of property, plant and equipment, identifiable intangibles and goodwill, warrant liability,
derivative liabilities, the valuation allowance of deferred taxes, contingencies and equity compensation. Actual results
could differ from those estimates.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with a maturity of three months or less at the date of acquisition
to be cash equivalents.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at amounts due from clients, net of an allowance for doubtful accounts. The Company monitors its accounts
receivable balances on a monthly basis to ensure that they are collectible. On a quarterly basis, the Company uses its historical
experience to estimate its accounts receivable reserve. The Company’s allowance for doubtful accounts is an estimate based
on specifically identified accounts as well as general reserves. The Company evaluates specific accounts where it has information
that the client may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on
the best available facts and circumstances, and records a specific reserve for that client against amounts due to reduce the receivable
to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information
is received that impacts the amount reserved. The Company also establishes a general reserve for all clients based on a range
of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If
circumstances change, the Company’s estimate of the recoverability of amounts due the Company could be reduced or increased
by a material amount. Such a change in estimated recoverability would be accounted for in the period in which the facts that give
rise to the change become known.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Carrying
Value, Recoverability and Impairment of Long-Lived Assets
The
Company has adopted Section 360-10-35 of the FASB Accounting Standards Codification for its long-lived assets. Pursuant to Paragraph
360-10-35-17 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”),
an impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and
exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall
be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall
be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. Pursuant to
ASC Paragraph 360-10-35-20, if an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its
new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful
life of that asset. Restoration of a previously recognized impairment loss is prohibited.
Property
and Equipment
Property and equipment
are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to
operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated
residual values) over the estimated useful lives of the respective assets which range from three to ten years or the lease term,
if shorter, for leasehold improvements.
Upon
sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is reflected in the consolidated statements of operations.
Goodwill
The
Company reviews goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of a triggering event.
The Company performs reviews of each of its operating divisions and variable interest entities (collectively, “reporting
units”) that have goodwill balances. Generally, fair value is determined using a multiple of earnings, or discounted projected
future cash flows, and is compared to the carrying value of a reporting unit for purposes of identifying potential impairment.
Project future cash flows are based on management’s knowledge of the current operating environment and expectations for
the future. Goodwill impairment is recognized for any excess of the carrying value of the reporting unit’s goodwill over
the fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The identification
of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant
judgments by management. These judgments include the consideration of the general economic outlook, industry and market considerations,
cost factors, overall financial performance, events which are specific to the Company, and trends in the market price of our common
stock. Each factor is assessed to determine whether it impacts the impairment test as well as the magnitude of any such impact.
While RedZone Map is a fully functioning app available for free in the Apple App Store and the Google Play Store, the Company
did not derive any advertising or other revenues from the app during the year ended December 31, 2017. Further, the Company was
not able to secure contracts with customers during the year ended December 31, 2017. As such the Company determined that an assessment
of Zone’s goodwill should be performed. The analysis of the fair value involved using the discounted cash flow method. Based
on the analysis, the Company concluded that its carrying value exceeded its fair value. As a result, the Company recorded $4,599,969
of goodwill impairment during the year ended December 31, 2017.
Intangible
Assets, net
Intangible assets
consist of customer relationships, technology, trademarks, broker relationships and patents. Applicable long-lived assets are
amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue
generation are reviewed periodically for appropriateness and are based upon management’s judgment. Intangible assets are
amortized on the straight-line method over their useful lives ranging from 3 to 12 years.
The
Company recorded amortization expense of $1,917,247 and $246,509 during the year ended December 31, 2017 and 2016, respectively.
The
Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering
events have occurred. These events include current period losses or a projection of continuing losses or a significant decrease
in the market value of an asset. When a triggering event occurs, an impairment calculation is performed, comparing projected undiscounted
future cash flows, utilizing current cash flow information and expected growth rates, to the respective carrying value. If the
Company identifies impairment for long-lived assets to be held and used, the Company compares the assets’ current carrying
value to the assets’ fair value. Fair value is based on current market values or discounted future cash flows. The Company
records impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal,
the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar
assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair
market value, reduced by estimated direct costs of disposal.
The
Company recorded impairment charges of $1,657,014 and $0, in regard to definite-lived intangible assets for the years ended December
31, 2017 and 2016, respectively.
Debt
Discount and Debt Issuance Costs
Debt
discounts and debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to
interest expense based on the related debt agreements using the effective-interest method.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Derivative
Instruments
The
Company evaluates its convertible notes and warrants to determine if those contracts or embedded components of those contracts
qualify as derivatives to be separately accounted for in accordance with Paragraph 815-10-05-4 of the FASB ASC and Paragraph 815-40-25
of the Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market
each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in
fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities are classified in the balance sheet as current or non-current to correspond with its host instrument.
The
Company marks to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the
change in the fair value of the remaining embedded derivative warrants as other income or expense in the statements of operations.
The
Company utilizes the Monte Carlo Method that values the liability of the debt conversion feature derivative financial instruments
and derivative warrants based on a probability of a down round event. The reason the Company selected the lattice binomial model
is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex
that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately
captured by simple models.
Warrant Liability
The Company evaluates its
warrants to determine if those contracts qualify as liabilities in accordance with ASC 480-10. The result of this accounting treatment
is that the fair value of the warrant liability is marked-to-market each balance sheet date and recorded as a liability, with
the change in fair value recorded in the statements of operations as other income or expense. Upon conversion or exercise of a
warrant liability, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
For warrants with
a fixed conversion price and a fixed number of shares, the Company utilizes a Black Scholes model for valuation. For warrants with
variability in the number of shares or conversion price (such as a down round feature), the Company utilizes the Monte Carlo Method
to value the warrant liability. The reason the Company selected the lattice binomial model is that in many cases there may be multiple
embedded features or the features may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument.
Therefore, the fair value may not be appropriately captured by simple models.
Revenue
Recognition
Consulting
revenues are recognized as services are provided. The Company primarily provides consulting services under time and material contracts,
whereby revenue is recognized as hours and costs are incurred. Clients for consulting revenues are billed on a weekly or monthly
basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method,
which is based on costs incurred to date relative to total estimated costs. Any anticipated contract losses are estimated and
accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based
on services performed in advance of customer billings. Revenue from sales of software licenses is recognized upon delivery of
the software to a customer because future obligations associated with such revenue are insignificant.
As
of December 31, 2017, the Company owns a majority interest in MoviePass, a movie-theater subscription service which provides subscribers
access to one movie per day at participating theatres, subject to availability, at a fixed monthly or annual fee.
We
recognize revenue when four basic criteria are met: (1) persuasive evidence exists of an arrangement with the customer reflecting
the terms and conditions under which the services will be provided; (2) the services have been provided; (3) the fee is fixed
or determinable; and (4) collection is reasonably assured. We consider an activated subscription agreement to be persuasive evidence
of an arrangement. Subscription revenue is generated primarily through the sale of monthly or annual paid subscriptions to the
MoviePass service. Subscription revenue is recognized evenly over the subscription periods as services are provided. Subscription
fees are predominantly paid by charges to customer credit cards or collected from third party partners. We record cash received
in advance of revenue recognition as deferred revenue.
Research
and Development
Research
and development costs are charged to operations when incurred and are included in operating expenses.
Stock
Based Compensation
The
Company follows the fair value recognition provisions in ASC 718,
Stock Compensation
(“ASC 718”) and the provisions
of ASC 505 (“ASC 505”) for stock-based transactions with non-employees. Stock based compensation expense recognized
during the year includes compensation expense for all share-based payments based on a grant date fair value estimated in accordance
with the provisions in the FASB guidance for stock compensation. The grant date is the date at which an employer and employee
reach a mutual understanding of the key terms and conditions of a share based payment award.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Advertising
The Company expenses
advertising costs when incurred and included in selling, general and administrative expenses and amounted to $134,734 and $0 for
the years ended December 31, 2017 and December 31, 2016, respectively.
Comprehensive
Loss
Comprehensive
loss consists of two components, net loss and other comprehensive loss. Other comprehensive loss refers to revenue, expenses,
gains and losses that are recorded as an element of stockholder’s equity but are excluded from net loss. The Company’s
other comprehensive loss is comprised of foreign currency translation adjustments.
Foreign
Currency Translation
Assets, liabilities,
revenue and expenses denominated in non-U.S. currencies are translated at the rate of exchange prevailing on the date of the consolidated
balance sheet. Gains (losses) on translation of the consolidated financial statements are from the Company’s subsidiary where
the functional currency is not the U.S. dollar. Translation gains (losses) are reflected as a component of accumulated other comprehensive
income (loss). Gains (losses) on foreign currency transactions are included in the consolidated statements of operations.
Income
Taxes
Income
taxes are provided in accordance with ASC No. 740,
Accounting for Income Taxes
. A deferred tax asset or liability is recorded
for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit)
results from the net change during the period of deferred tax assets and liabilities.
Deferred
tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
The
Company is no longer subject to tax examinations by tax authorities for years prior to 2013.
The Company had income
tax provision of $53,532 and a tax benefit of $14,665 for the year ended December 31, 2017 and 2016, respectively. Tax for the
year ended December 31, 2017 was comprised of minimum state taxes and a provision reconciliation of an over estimate of the tax
accrual for the Company’s Indian subsidiary’s audit.
On December 22, 2017,
the United States enacted the Tax Cuts and Jobs Act ("Tax Act"), which made significant changes to the U.S. federal income
tax law.
The Tax
Act will affect 2018 and forward, including but not limited to a reduction in the federal corporate rate from 35.0% to 21.0%, elimination
of the corporate alternative minimum tax, a new limitation on the deductibility of certain executive compensation, limitations
on net operating losses generated after December 31, 2017 and various other items. We do not expect these changes to have a material
impact on our financial statements due to the accumulated net operating losses in the U.S.
The Tax Act provides
for a one-time “deemed repatriation” of accumulated unrepatriated foreign earnings determined as of November 2, 2017,
or December 31, 2017, whichever is greater. We do not expect to be subject to this provision due to availability of federal net
operating losses to offset any repatriation tax. in our foreign earnings for tax purposes. The Tax Act also created a new requirement
that certain income earned by controlled foreign corporations must be included currently in the gross income of the U.S. shareholder
under the Global Intangible Low-Taxed (GILTI) provision. We do not expect that any future foreign earnings will be subject to GILTI
due to our federal net operating losses.
Earnings
Per Share
Earnings
per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term
is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the ASC. Pursuant to ASC
Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS is computed by dividing income available to common stockholders (the numerator)
by the weighted-average number of common shares outstanding (the denominator) during the period. The computation of diluted EPS
is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the
potential dilution that could occur from common shares issuable through contingent shares issuance arrangements, stock options
or warrants.
The following table
shows the outstanding dilutive common shares excluded from the diluted net loss per share attributable to common stockholder’s
calculation as they were anti-dilutive:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Warrants
|
|
|
9,631,588
|
|
|
|
70,714
|
|
Conversion features on convertible notes
|
|
|
1,370,396
|
|
|
|
511,989
|
|
Total potentially dilutive shares
|
|
|
11,001,984
|
|
|
|
582,703
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Reclassification
Certain
prior period amounts have been reclassified to conform to current period presentation.
Business
Combinations
The
Company accounts for business combinations under the acquisition method of accounting. Identifiable assets acquired, liabilities
assumed and non-controlling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Additionally,
contingent consideration is recorded at fair value on the acquisition date and classified as either liability or equity. Goodwill
is recognized to the extent by which the aggregate of the acquisition date fair value of the consideration transferred and any
non-controlling interests in the acquiree exceeds the recognized basis of the identifiable assets acquired net of assumed liabilities.
Determining the fair value of assets acquired liabilities assumed and non-controlling interests requires management’s judgement
and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows,
discount rates and asset lives among other items. Acquisition related costs, including advisory, legal, accounting valuation and
other costs are expensed in the periods in which the costs are incurred. The results of operations of acquired businesses are
included in the consolidated financial statements form the date of acquisition.
Fair
Value Measurements
ASC
Topic 820,
Fair Value Measurement and Disclosures
, defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy
which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of
inputs that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in an active market for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not
active.
Level
3: Unobservable inputs that are supported by little or no market activity, therefore the inputs are developed by the Company using
estimates and assumptions that the Company expects a market participant would use.
The
carrying value of the Company’s short-term investments, prepaid expenses and other current assets, accounts receivable,
accounts payable and accrued expenses approximate fair value because of the short-term maturity of these financial instruments.
The
derivative liability in connection with the conversion feature of the Company’s convertible debt and warrants and the Conversion
Shares subject to forfeiture are classified as level 3 liabilities, and are measured at fair value on a recurring basis.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09,
“Revenue from Contracts with Customers”
(“ASU 2014-09”), which supersedes nearly all
existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised
goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled
for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment
and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. In addition,
this guidance requires new or expanded disclosures related to the judgments made by companies when following this framework and
additional quantitative disclosures regarding contract balances and remaining performance obligations. ASU No. 2014-09 may be
applied using either a full retrospective approach, under which all years included in the financial statements will be presented
under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared under the
revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize a cumulative
catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require performance
by the entity.
ASU
No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those
annual reporting periods. The Company developed an implementation plan to adopt this new guidance, which included an assessment
of the impact of the new guidance on our financial position and results of operations. The Company has substantially completed
its assessment and has determined that this standard will have no impact on its financial position or results of operations, except
enhanced disclosure regarding revenue recognition, including disclosures of revenue streams, performance obligations, variable
consideration and the related judgments and estimates necessary to apply the new standard. On January 1, 2018, the Company adopted
the new accounting standard ASC 606,
Revenue from Contracts with Customers
and for all open contracts and related amendments
as of January 1, 2018 using the modified retrospective method. Results for reporting periods beginning after January 1, 2018 will
be presented under ASC 606, while the comparative information will not be restated and will continue to be reported under the
accounting standards in effect for those periods.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
During January 2016,
the FASB issued ASU No. 2016-01,
Financial Instruments — Overall: Recognition and Measurement of Financial Assets and
Financial Liabilities
, (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation,
and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to the presentation of
other comprehensive income. On January 1, 2018, the Company adopted the new accounting standard and has substantially
completed its assessment and has determined that this standard will have no impact on its financial position or results of operations.
In
February 2016, the FASB issued ASU 2016-02,
Leases,
(“ASC 842”), which supersedes FASB ASC 840,
Leases
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.
The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on
the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine
whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve
months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance
for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption
permitted upon issuance. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-02 on
its results of operations, cash flows and financial position.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(“ASC 230”)
: Classification of Certain
Cash Receipts and Cash Payments,
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
Income Taxes
(“ASC 740”)
: Intra-Entity Transfers of Assets Other
than Inventory
, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for
intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance
is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early
adoption of the update is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-16 on its consolidated
financial statements.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
(“ASC 230”), requiring that the statement
of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The Company is currently in the process of evaluating the impact
of ASU 2016-18 on its consolidated financial statements.
In January 2017, the
FASB issued ASU No 2017-04
Intangibles-Goodwill and Other
(“ASC 350”):
Simplifying the Accounting for Goodwill
Impairment
(“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2
from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures
to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities)
following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business
combination. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the
fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which
the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount
of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is
effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019 and an entity
should apply the amendments of ASU 2017-04 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effects of ASU 2017-04 on its audited
consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share
(“ASC 260”)
, Distinguishing Liabilities from
Equity
(“ASC 480”)
, and Derivatives and Hedging
(“ASC 815”). ASU No. 2017-11 is intended to
simplify the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed are:
(i) determining whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities
from equity for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily
redeemable non-controlling interests. ASU No. 2017-11 is effective for the Company on January 1, 2019. The Company is currently
evaluating the potential impact of ASU No. 2017-11 on the Company’s consolidated financial statements.
8.
|
Prepaid
Expenses and Other Current Assets
|
Prepaid
expenses and other current assets consisted of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Vendor deposits
|
|
$
|
147,533
|
|
|
$
|
300,199
|
|
Tax
|
|
|
108,433
|
|
|
|
187,776
|
|
Deposits
|
|
|
230,711
|
|
|
|
-
|
|
Insurance
|
|
|
86,181
|
|
|
|
44,517
|
|
Professional fees and services
|
|
|
2,918,611
|
|
|
|
42,833
|
|
Rent
|
|
|
52,650
|
|
|
|
13,087
|
|
Other
|
|
|
13,692
|
|
|
|
8,759
|
|
Total prepaid expenses and other current assets
|
|
$
|
3,557,811
|
|
|
$
|
597,171
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
9.
|
Convertible
Promissory Note of MoviePass
|
On August 15,
2017, in connection with the MoviePass SPA, the Company loaned MoviePass $4,950,000 in cash pursuant to a Second Amended and Restated
Subordinated Convertible Note Purchase Agreement whereby, in exchange for such cash payment, the Company received the MoviePass
Note in the principal amount of $5,000,000, which included an additional $50,000 that was advanced by the Company to MoviePass
for legal and audit expenses prior to such date. On October 6, 2017, the MoviePass Note was amended and restated to increase the
principal amount from $5,000,000 to $11,500,000. As described in Note 3, the MoviePass Note was exchanged pursuant to the close
of the MoviePass Transaction.
10.
|
Property
and Equipment, net
|
Property
and equipment, net on December 31, 2017 and December 31, 2016 are as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Equipment and leaseholds
|
|
$
|
130,956
|
|
|
$
|
106,460
|
|
Furniture and
fixtures
|
|
|
163,721
|
|
|
|
34,186
|
|
Software
|
|
|
213,945
|
|
|
|
167,337
|
|
Subtotal
|
|
|
508,622
|
|
|
|
307,983
|
|
Less: Accumulated depreciation
|
|
|
(274,587
|
)
|
|
|
(262,771
|
)
|
Total
|
|
$
|
234,035
|
|
|
$
|
45,212
|
|
The
Company recorded depreciation expense of $34,730 and $12,870 for the year ended December 31, 2017 and 2016, respectively.
11.
|
Intangible
Assets, net and Goodwill
|
The
Company’s intangible assets consisted of the following on December 31, 2017 and December 31, 2016:
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Estimated Useful Life
|
|
Net Book Value
|
|
|
Net Book Value
|
|
Customer relationships
|
|
7
|
|
$
|
2,560,000
|
|
|
$
|
-
|
|
Technology
|
|
3
|
|
|
8,070,000
|
|
|
|
4,270,000
|
|
Tradenames and trademarks
|
|
7
|
|
|
19,550,000
|
|
|
|
1,977,000
|
|
Broker relationships
|
|
5
|
|
|
-
|
|
|
|
4,200
|
|
Patents
|
|
12
|
|
|
196,353
|
|
|
|
-
|
|
Subtotal
|
|
|
|
|
30,376,353
|
|
|
|
6,251,200
|
|
Less: Accumulated amortization
|
|
|
|
|
(1,839,571
|
)
|
|
|
(246,509
|
)
|
Total
|
|
|
|
$
|
28,536,782
|
|
|
$
|
6,004,691
|
|
The
Company recorded amortization expense of $1,917,247 and $246,509 for the years ended December 31, 2017 and 2016, respectively.
The
following table outlines estimated future annual amortization expense for the next five years and thereafter:
December 31,
|
|
|
|
2018
|
|
$
|
5,026,976
|
|
2019
|
|
|
4,821,384
|
|
2020
|
|
|
3,532,137
|
|
2021
|
|
|
2,336,976
|
|
2022
|
|
|
2,336,976
|
|
Thereafter
|
|
|
10,482,333
|
|
|
|
$
|
28,536,782
|
|
Goodwill
represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Goodwill and
indefinite lived intangible assets are tested for impairment annually as of December 31
st
and more often if a triggering
event occurs, by comparing the fair value of each reporting unit to its carrying value.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
There
were impairment charges recognized during the years ended December 31, 2017 and 2016 of $4,599,969 and $0, respectively, that
related to goodwill associated with the acquisition of Zone. In addition, in 2017 the Company recognized impairment charges of
$1,657,014 related to the net book value of trademarks and broker relationships associated with the Zone acquisition.
The
following table summarizes our goodwill balances at December 31, 2017 as well as changes to goodwill during 2017:
Balance as of December 31, 2016
|
|
$
|
4,599,969
|
|
Goodwill acquired – MoviePass acquisition
|
|
|
79,137,177
|
|
Goodwill impairment charge – Zone Technologies, Inc.
|
|
|
(4,599,969
|
)
|
Balance as of December 31, 2017
|
|
$
|
79,137,177
|
|
12.
|
Accounts Payable and Accrued Expenses
|
As of December 31,
2017 and December 31, 2016, accounts payable and accrued expenses consisted of the following:
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Accounts payable
|
|
$
|
5,087,060
|
|
|
$
|
517,973
|
|
Accrued ticket expense
|
|
|
4,743,582
|
|
|
|
-
|
|
Accrued professional fees
|
|
|
597,187
|
|
|
|
509,433
|
|
Accrued credit card fees
|
|
|
782,670
|
|
|
|
-
|
|
Accrued payroll expense
|
|
|
312,149
|
|
|
|
187,835
|
|
Accrued other expense
|
|
|
852,841
|
|
|
|
115,877
|
|
Accrued interest
|
|
|
768,515
|
|
|
|
-
|
|
Total
|
|
$
|
13,144,003
|
|
|
$
|
1,331,118
|
|
13.
|
Securities
Purchase Agreement
|
Senior
Secured Convertible Notes and Warrants
On September 7, 2016, the
Company issued Senior Secured Convertible Notes (“September 2016 Notes”) in the aggregate principal amount of $4,301,075
for consideration consisting of (i) a cash payment by an institutional investor (the “Investor”) in the amount of
$1,000,000 together with a secured promissory note payable by the Investor to the Company (the “Investor Note”) in
the principal amount of $3,000,000 to finance a portion of the purchase price, fees and expenses for the acquisition of Zone.
The September 2016 Notes had a maturity date of December 7, 2017. As of December 31, 2017, the Investor had fully prepaid the
Investor Note and subsequently converted the amount due under the September 2016 Notes into 83,306 shares during the year ended
December 31, 2017 and 804,401 shares during the year ended December 31, 2016 of the Company’s common stock in full payment
of the September 2016 Notes. On any principal balance owed by the Company to the Investor, a 6% interest obligation was due quarterly
and calculated on a 360-day basis. For the twelve months ended December 31, 2017, the Company had interest expense of $1,217 related
to the September 2016 Notes as the final principal balance was converted in January of 2017.
On December 2, 2016,
the Company issued two Senior Secured Convertible Notes (the “December 2016 Notes”) to the Investor in the aggregate
principal amount of $6,720,000 for consideration consisting of (i) a cash payment by the Investor in the amount of $1,100,000
and (ii) a secured promissory note payable by the Investor to the Company (the “December 2016 Investor Note”) in the
principal amount of $4,900,000 to aid in the funding of Zone prior to the entity’s ability to generate revenues. The unpaid
principal amount of the secured promissory note is offset by the same principal amount owed to the Company pursuant to the December
2016 Investor Note. As cash payments are applied to the December 2016 Investor Note, a derivative liability is recognized and placement
agent warrants are issued. At the time of issuance, a note in the amount of $720,000 was issued as an original issue discount in
conjunction the December 2016 Notes. This note, and both the derivative liability and the warrants are accounted for as debt discount
to the December 2016 Notes and accreted into interest expense over the life of the note using the effective interest method. The
December 2016 Notes had a maturity date of August 2, 2017 which was subsequently amended to October 8, 2017. On September 19, 2017
(the “Exchange Date”) $5,820,000 of the principle balance of this noted had already been converted to shares of the
Company’s common stock when the Company and the Investor entered into an Amendment and Exchange Agreement. Pursuant to this
agreement, the Company exercised a mandatory conversion of $890,000 of the remaining $900,000 in principal of the December 2016
Notes in exchange for 445,367 shares of the Company’s common stock and an Investor prepayment of $670,000 of the December
2016 Investor Note. The principal balance converted contained an original issuance discount related to placement agent warrants
issued in conjunction with the financing and a derivative liability associated with the embedded conversion feature. Upon exercise
of the mandatory conversion, the outstanding balance of the original issuance discount was derecognized through interest expense.
On the Exchange Date the Company issued to the Investor a Senior Convertible Note in the principal amount of $697,000 (the “Exchange
Note”) in exchange for the remaining $10,000 outstanding principal amount of the December 2016 Notes. With the issuance of
the Exchange Note, the resulting cash flows of the remaining December 2016 Notes were considered to be significantly modified within
the context of ASC 470 and a loss on extinguishment was recognized in the amount of $683,885. The Exchange Note was a non-interest-bearing
note and was convertible into shares of the Company’s common stock at a price of $3.00 per share. As of December 31, 2017,
the Investor had fully converted the Exchange Note for 232,334 shares of the Company’s common stock. Interest for the December
2016 Notes accrued at the rate of 6%, was due quarterly and was calculated on a 360-day basis. For the twelve months ended December
31, 2017, the Company had $150,265 of interest expense pertaining to the unpaid principal amount of the December 2016 Notes.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
On February 8, 2017,
the Company issued two Senior Secured Convertible Notes (the “February 2017 Notes”) to the Investor in the aggregate
principal amount of $5,681,818 for consideration consisting of a secured promissory note payable by the Investor to the Company
(the “February 2017 Investor Note”) in the principal amount of $5,000,000 which offsets the February 2017 notes of
the same amount. The issuance of this note is meant to aid in the funding of Zone prior to the entity’s ability to generate
revenues. Upon issuance, the initial note with a principal balance of $681,818 was accounted for as an original issuance discount
and accreted into interest expense over the life of the note. As cash payments are applied to the February 2017 Investor Note,
a derivative liability is recognized and placement agent warrants are issued. Both the derivative liability and the warrants are
accounted for as debt discount to the February 2017 Notes and accreted into interest expense over the life of the note using the
effective interest method. The February 2017 Notes had a maturity date of October 8, 2017. As of December 31, 2017, the Investor
had fully prepaid the February 2017 Investor Note and had subsequently converted the principal amount due under the February 2017
Notes and approximately $49,000 of interest into 1,852,886 shares of the Company’s common stock in full payment of the February
2017 Notes. On any principal balance owed by the Company to the Investor, a 6% interest obligation was due quarterly and calculated
on a 360-day basis. For the year ended December 31, 2017, the Company had interest expense of $173,963 related to the February
2017 Notes as the final principal balance was converted in August 2017. In a letter agreement executed on August 27, 2017, in consideration
for the prepayment in the amount of $2,500,000, on the February 2017 Investor Note, which the Investor subsequently made on August
28, 2017, the Investor and the Company agreed that the Investor would have the right, but not the obligation, until December 31,
2017, to effect an exchange (the “Share Exchange”) of 841,250 shares of the Company’s common stock (the “Exchange
Shares”) for one or more senior secured convertible promissory notes in the form of the February Additional Note (the “New
Note”), with the right to substitute the alternate conversion price of the New Note with the alternate conversion price of
the Company’s Series B Senior Secured Convertible Note (the “Series B Note”) that was issued on August 16, 2017.
Any New Note issued would be in the principal amount equal to the product of the prepayment amount ($2,500,000) multiplied by a
fraction, the numerator of which was the number of the aggregate shares being tendered to the Company in the Share Exchange and
the denominator of which is 841,250. The maturity date of any New Note was 45 days following the issuance of the New Note, and
the conversion price of the New Notes was $4.50, or, at the election of the Investor, the Investor could convert at the Alternate
Conversion Price. The Alternate Conversion Price was defined as either (A) the lower of (i) $4.50 and (ii) the greater of (I) $4.00
and (II) 85% of the quotient of (x) the sum of the volume weighted average price of the common stock for each of the 5 consecutive
trading days ending on the trading day immediately preceding the delivery of the Conversion Notice, divided by (y) 5 or (B) that
price which shall be the lowest of (i) $3.00 and (ii) the greater of (I) the Floor Price then in effect and (II) 85% of the quotient
of (x) the sum of the volume weighted average price of the Company’s common stock for each of the 5 consecutive trading days
ending and including the date of the alternate conversion, divided by (y) 5. The Floor Price was defined as $3.00 through October
4, 2017 and $0.50 following October 4, 2017. On October 23, 2017, the Company and the Investor entered into a Third Amendment and
Exchange Agreement (the “Third Exchange Agreement”) for the purpose of exchanging the New Note for 947,218 shares of
common stock (the “New Exchange Shares”) and rights (the “Rights”) to receive 552,782 additional shares
of common stock. As partial consideration for the New Exchange Shares and the Rights, the Investor agreed, among other things,
to terminate the Investor’s right to exchange the remaining Exchange Shares for New Notes. The termination of these rights
is accounted for as financing fees associated with the February 2017 Notes and valued at $19,950,000 based on the trading price
of the Company’s stock on the date of the Third Amendment and Exchange Agreement.
On August 16, 2017,
the Company issued three Senior Secured Convertible Notes (the “August 2017 Notes”) in the aggregate principal amount
of $10,300,000 and a 5-year warrant for the purchase of 1,892,972 shares of the Company’s common stock at an exercise price
of $3.25 per share (the “Investor Warrant”) to the Investor for consideration consisting of a secured promissory note
payable by the Investor to the Company (the “August 2017 Investor Note”) in the principal amount of $8,800,000 and
$220,000 which offsets the August 2017 Notes of the same amount. The issuance of these notes is meant to aid in the funding of
the acquisition of the MoviePass Shares (the “MoviePass Shares”). The August 2017 Notes have a maturity date of April
16, 2018 and the Investor Warrant will expire on April 16, 2022. The $220,000 secured promissory note payable by the Investor is
issued in exchange for a $250,000 Senior Secured Convertible Note, therefore a discount of $30,000 is recognized upon issuance
and accreted into interest expense over the life of the note using the effective interest method. Upon issuance, the Investor Warrants
were recorded at fair value and accounted for as an original issuance discount to the August 2017 Notes. The excess in value of
the Investor Warrants over the August 2017 Notes upon issuance was recorded as interest expense, while the capitalized balance
was accreted into interest expense over the life of the August 2017 Notes. At December 31, 2017, the contracted conversion prices
for the August 2017 Notes, which include an Initial Series A Note, an Additional Series A Note and the Series B Note, were $4.00
for the Initial Series A Note and the Additional Series A Note and $3.00 for the Series B Note. As of December 31, 2017, the Investor
had fully prepaid the August 2017 Investor Note and subsequently converted $5,794,560 in principal amount, plus accrued interest,
of the August 2017 Notes into 1,482,639 shares of the Company’s common stock. As of December 31, 2017, the unpaid principal
amount of the August 2017 Notes owed to the Investor was $4,505,440. On any principal balance owed by the Company to the Investor,
a 6% interest obligation is due quarterly and calculated on a 360-day basis. For the year ended December 31, 2017, the Company
had $115,096 of interest expense pertaining to the unpaid principal amount of the August 2017 Notes with $68,572 accrued as of
year end.
The
Investor Warrant included anti-dilution provisions. The anti-dilution provisions were triggered when the Company issued the Exchange
Note in the principal amount of $697,000 to the Investor. Because the Exchange Note had a conversion price of $3.00 per share,
which was lower than the Investor Warrant per share exercise price of $3.25, the number of shares of the Company’s common
stock issuable to the Investor pursuant to the Investor Warrant was increased from 1,892,972 to 2,050,720 and the per share exercise
price of the Investor Warrant was decreased from $3.25 to $3.00. As of December 31, 2017, the Investor had elected to, in a cashless
transaction, exercise the Investor Warrant to purchase 1,715,006 shares of common stock and also paid the Company $977,142 to
exercise the Investor Warrant for an additional 325,714 shares of common stock. On November 21, 2017 in conjunction with the Fourth
Amendment and Exchange Agreement, the remaining 10,000 shares of common stock subject to the Investor Warrant were exchanged for
a new warrant (the “Exchange Warrant”). The Exchange Warrant is in substantially the form of the August Warrant, except
that:
|
●
|
The
Exchange Warrant has an exercise price of $14.31
|
|
●
|
The
expiration date of the Exchange Warrant is November 21, 2022.
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
|
●
|
The
Exchange Warrant may not be exercised for the purchase of shares of common stock unless
the stockholders of the Company approve the issuance in compliance with the rules and
regulations of the Nasdaq Capital Market (the “Stockholder Approval”).
|
|
●
|
The
Exchange Warrant is subject to redemption, refund or alternate cashless exercise after
the August Note is no longer outstanding (or on or after February 16, 2018 if the Company
fails to remain current in its filings or an event of default under the August 2017 Notes
occurs) (the “Adjustment Time”).
|
With the issuance
of the Exchange Warrant, the resulting cash flows of the remaining Investor Warrant were considered to be significantly modified
within the context of ASC 470. Accordingly, the incremental change in fair value between the Investor Warrant and the Exchange
Warrant is calculated as $12,878,864 and recorded as interest expense.
On November 7, 2017,
the Company issued two Senior Secured Convertible Notes (the “November 2017 Notes”) in the aggregate principal amount
of $100,000,000 (collectively, the “November 2017 Notes”) to institutional investors (the “Investors”).
The November Notes consist of a Senior Secured Convertible Note in the amount of $5,000,000 (the “November Initial Note”)
and a Senior Secured Convertible Note in the amount of $95,000,000 (the “November Additional Note”) in exchange for
an upfront cash payment of $5,000,000 and a senior secured promissory note of $95,000,000 (the “November 2017 Investor Note”)
to aid in the funding of the acquisition of the MoviePass Shares. As of December 31, 2017, the investors prepaid $15,650,000 of
the November 2017 Investor Note with the remaining principal being subject to master netting agreements between the Company and
the Investors. In conjunction with the prepayment, the Company was also obligated to pay the Investor interest which would have
accrued with respect to the outstanding balance for the period from the redemption through the maturity date (the “Make-Whole
Interest”). The Company elected to defer payment of the Make-Whole Interest by capitalizing the full balance under the same
terms as the original November 2017 Notes. As of December 31, 2017 the outstanding balance owed on the Make-Whole Interest was
$2,943,069. The November 2017 Notes have a maturity date of November 7, 2019. As of December 31, 2017, the contracted conversion
prices for the November 2017 Notes, which include both the November Initial Note and November Additional Note, were $12.06. As
of December 31, 2017, the Investors had converted $0 of the November 2017 Notes into shares of the Company’s common stock.
On any unfunded principal balance of the November 2017 Investor Notes the Company owed to the Investors a 5.25% interest obligation
which is due quarterly and calculated on a 360-day basis. For the funded portion of the November 2017 Notes the Company has a 10%
interest obligation. For the year ended December 31, 2017, the Company had $4,714,723 of interest expense pertaining to the
November 2017 Notes and $633,873 accrued at yearend.
The Placement Agent Notes and Warrants
The Company entered
into an agreement with a placement agent (the “Placement Agent”) for assistance with the placement of the September
2016 Notes. The Placement Agent accepted from the Company a Senior Secured Convertible Note (the “September Placement Note”)
in the aggregate amount of $80,000 in partial payment of the Placement Agent’s fee. Unless earlier converted or redeemed,
the September Placement Note matures 15 months from the date of issuance. The Placement Agent Note bears interest at a rate of
6% due quarterly and calculated on a 360-day basis. For the twelve months ended December 31, 2017, the Company had interest expense
pertaining to the September Placement Note in the amount of $1,200. The Placement Agent also received a 5-year warrant (the “Placement
Agent Warrant”) for the purchase of the Company’s common stock as partial payment for the Placement Agent’s services.
The Placement Agent Warrant is issued in tranches in conjunction with cash payments received by the Company on the corresponding
Investor Note. During 2016, Placement Agent Warrants were earned allowing for the purchase of 48,714 shares of the Company’s
common stock at exercise prices ranging from $4.54 per share to $9.36 per share. On October 2, 2017 the Placement Agent elected
to exercise the Placement Agent Warrant in full in the form of a cashless exercise, calculated based on the September 29, 2017
VWAP. On October 5, 2017, 22,578 shares were issued.
The Company entered
into an agreement with the Placement Agent for assistance with the placement of the December Notes. The Placement Agent accepted
from the Company a 5-year warrant (the “December Placement Agent Warrant”) as partial payment for the Placement Agent’s
services. The December Placement Agent Warrant is issued in tranches in conjunction with cash payments received by the Company
on the corresponding December 2016 Investor Note. As of December 31, 2016, the Placement Agent had the right to purchase, pursuant
to the terms of the December Placement Agent Warrant, 22,000 shares of the Company’s common stock at an exercise price of
$4.54 per share. Through the first nine months of 2017 the Company has received $4,900,000 of cash payments for the December Notes,
resulting in the issuance of an additional 104,001 December Placement Agent Warrants at exercise prices of $3.00 per share, $3.47
per share, $4.00 per share and $6.13 per share. On October 6, 2017 the Placement Agent elected to exercise the Placement Agent
Warrant in full in the form of a cashless exercise, calculated based on the September 29, 2017 VWAP. On October 6, 2017, 84,735
shares were issued.
The Company entered
into an agreement with the Placement Agent for assistance with the placement of the February 2017 Notes. The Placement Agent accepted
from the Company a 5-year warrant (the “February Placement Agent Warrant”) as partial payment for the Placement Agent’s
services. The February Placement Agent Warrant allows the purchase of up to 8% of the number of shares of the Company’s common
stock into which the unrestricted principal of the February 2017 Notes may be converted. Through the first nine months of 2017
the Company received $5,000,000 of cash payments for the February 2017 Notes, resulting in the issuance of an additional February
Placement Agent Warrants for the purchase of 133,334 shares of common stock at an exercise price of $3.00 per share. As of December
31, 2017 the Placement Agent has not elected to exercise the Placement Agent Warrant.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
The Company entered
into an agreement with the Placement Agent for assistance with the placement of the August 2017 Notes and Investor Warrant. The
Placement Agent accepted from the Company a 5-year warrant (the “August Placement Agent Warrant”) as partial payment
for the Placement Agent’s services. The August Placement Agent Warrant allows the purchase of up to 8% of the number of shares
of the Company’s common stock into which the unrestricted principal of the Additional Series A Note and the Series B Note
in the combined principal amount of $9,050,000 becomes convertible at an exercise price equal to the greater of the exercise price
of the August 2017 Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement
Agent becomes entitled to the warrant. During the period ended December 31, 2017, the Company received $8,800,000 of cash
payments in conjunction with the August 2017 Notes and issued 176,000 of August Placement Agent Warrants for the purchase of shares
of common stock at exercise prices of $3.00 and $14.27 per share. As of December 31, 2017, the Placement Agent has not elected
to exercise any shares of the August Placement Agent Warrants.
The Company entered
into an agreement with the Placement Agent for assistance with the placement of the November 2017 Notes. The Placement Agent accepted
from the Company a 5-year warrant (the “November Placement Agent Warrant”) as partial payment for the Placement Agent’s
services. The November Placement Agent Warrant allows the purchase of up to 8% of the number of shares of the Company’s common
stock into which the unrestricted principal of the November Series A Note and the November Series B Note in the combined principal
amount of $100,000,000 becomes convertible at an exercise price equal to the greater of the exercise price of the November 2017
Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement Agent becomes entitled
to the November Placement Agent Warrant. During the period ended December 31, 2017, the Company received $11,400,000 of cash payments
for the November 2017 Notes resulting in the issuance of 75,618 warrants at exercise prices of $12.06 per share. As of December
31, 2017, the Placement Agent had not purchased any shares from the exercise of the November Placement Agent Warrants.
Note
Activity:
Senior
Secured Convertible Notes consist of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
September Notes
|
|
$
|
-
|
|
|
$
|
20,480
|
|
September Placement Note
|
|
|
-
|
|
|
|
902
|
|
December Notes
|
|
|
-
|
|
|
|
10,043
|
|
February 2017 Notes
|
|
|
-
|
|
|
|
-
|
|
August 2017 Notes
|
|
|
2,061,072
|
|
|
|
-
|
|
September 2017 Exchange Note
|
|
|
-
|
|
|
|
-
|
|
November 2017 Notes
|
|
|
1,550,555
|
|
|
|
-
|
|
|
|
$
|
3,611,627
|
|
|
$
|
31,425
|
|
Under
ASC 210-20-45-1, management offset the Notes by the Investor Notes yet to be funded.
The
carrying value of the Senior Secured Convertible Notes is comprised of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
September 2016 Notes
|
|
$
|
-
|
|
|
$
|
332,000
|
|
September Placement Agent Note
|
|
|
-
|
|
|
|
80,000
|
|
December 2016 Notes
|
|
|
-
|
|
|
|
1,820,000
|
|
February 2017 Notes
|
|
|
-
|
|
|
|
-
|
|
August 2017 Notes
|
|
|
4,505,440
|
|
|
|
-
|
|
September 2017 Exchange Note
|
|
|
-
|
|
|
|
-
|
|
November 2017 Notes
|
|
|
2,943,069
|
|
|
|
-
|
|
Unamortized discounts
|
|
|
(3,836,882
|
)
|
|
|
(2,200,575
|
)
|
|
|
$
|
3,611,627
|
|
|
$
|
31,425
|
|
During
the year ended December 31, 2017, the Investor converted a total of $19,215,378 in principal and $154,577 in interest into 5,577,605
shares of the Company’s common stock.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
14.
|
Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis
|
Financial
liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as
of December 31, 2017 and December 31, 2016:
|
|
|
|
|
Fair Value Measurement
Using Level 3
Inputs Total
|
|
|
|
Amount at Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – warrants
|
|
$
|
67,288,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
67,288,800
|
|
Derivative liability – conversion feature
|
|
|
4,834,462
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,834,462
|
|
Total
|
|
$
|
72,123,262
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72,123,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – warrants
|
|
$
|
230,663
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
230,663
|
|
Derivative liability – conversion feature
|
|
|
997,129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
997,129
|
|
Total
|
|
$
|
1,207,792
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,207,792
|
|
The
table below provides a summary of the changes in fair value, including net transfers in and/or out of all financial liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended December 31,
2017:
|
|
Amount
|
|
Balance at December 31, 2016
|
|
$
|
1,207,792
|
|
Purchases, issuances and settlements
|
|
|
119,670,364
|
|
Conversions to paid in capital
|
|
|
(14,009,654
|
)
|
Warrant exercises
|
|
|
(26,851,565
|
)
|
Change in fair value of warrant liabilities
|
|
|
20,409,937
|
|
Change in fair value of derivative liabilities
|
|
|
(28,303,612
|
)
|
Balance at December 31, 2017
|
|
$
|
72,123,262
|
|
The
fair value of the derivative conversion features and warrant liabilities as of December 31, 2017 and December 31, 2016 were calculated
using a Monte-Carlo option model valued with the following weighted average assumptions:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Amount
|
|
|
Amount
|
|
Dividend yield
|
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
0%
|
|
|
|
|
Expected volatility
|
|
|
45
|
%
|
|
|
-
|
|
|
|
270
|
%
|
|
|
154
|
%
|
|
|
-
|
|
|
|
230
|
%
|
Risk free interest rate
|
|
|
1.06
|
%
|
|
|
-
|
|
|
|
2.20
|
%
|
|
|
0.82
|
%
|
|
|
-
|
|
|
|
1.12
|
%
|
Contractual term (in years)
|
|
|
0.19
|
|
|
|
-
|
|
|
|
5.00
|
|
|
|
0.67
|
|
|
|
-
|
|
|
|
5.00
|
|
Exercise price
|
|
$
|
0.001
|
|
|
|
-
|
|
|
$
|
14.310
|
|
|
$
|
4.000
|
|
|
|
-
|
|
|
$
|
9.360
|
|
Changes
in the observable input values would likely cause material changes in the fair value of the Company’s Level 3 financial
instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the
estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant
increase (decrease) in this likelihood or in the volatility assumptions would result in a higher (lower) fair value measurement.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
15.
|
Stock
Based Compensation
|
The
Company has a stock-based compensation plan, which is described as follows:
On
March 3, 2014, the Board of Directors terminated the Company’s 1997 Stock Option and Award Plan and approved and adopted
the Helios and Matheson Analytics Inc. 2014 Equity Incentive Plan (the “2014 Plan”) which the Company’s stockholders
approved at the annual stockholders meeting on May 5, 2014. The 2014 Plan originally set aside and reserved 400,000 shares of
the Company’s common stock for grant and issuance in accordance with its terms and conditions. Persons eligible to receive
awards from the 2014 Plan include employees (including officers and directors) of the Company and its affiliates, consultants
who provide significant services to the Company or its affiliates, and directors who are not employees of the Company or its affiliates
(the “Participants”). The 2014 Plan permits the Company to issue to Participants qualified and/or non-qualified options
to purchase the Company’s common stock, restricted common stock, performance units, and performance shares. The 2014 Plan
will terminate on March 3, 2024. The Company’s Board of Directors is responsible for administration of the 2014 Plan and
has the sole discretion to determine which Participants will be granted awards and the terms and conditions of the awards granted.
In conjunction with the merger with Zone, the Company’s Board of Directors agreed to approve and adopt an amendment to the
2014 Plan to increase the number of shares available for issuance pursuant to awards made from the 2014 Plan to no more than 15%
of the Company’s common stock on a fully diluted basis immediately following the merger. The Board of Directors adopted
the amendment on August 10, 2017 reserving a total of 1,125,000 shares of common stock for issuance from the 2014 Plan. Of that
number, a total of 885,000 shares of common stock remained available for issuance on December 31, 2017.
As
of December 31, 2017 there have not been any stock option grants made pursuant to the 2014 Plan.
During
2017 the Company issued 240,000 shares of common stock pursuant to the 2014 Plan to a consultant for the Company and recognized
$841,200 in related stock compensation expense. Such amount is included in selling, general and administrative expenses.
From
time to time the Board of Directors has also authorized the issuance of shares of common stock outside of the 2014 Plan to consultants
and employees for services rendered. During 2017 the Company awarded 908,333 shares to consultants who provided services to the
Company. In connection with such awards the Company recorded stock compensation expense of $1,553,722 which is included in selling,
general and administrative expenses. Unamortized stock compensation costs related to these awards of $2,885,278 will be recognized
over the anticipated service period in 2018. During 2017, the Board authorized awards for an aggregate 2,242,167 shares of common
stock to employees and consultants for services provided during 2017 which shares had not been issued as of December 31, 2017.
Accordingly, the Company has recorded expense of $21,320,705 with respect to such awards which is included in selling, general
and administrative expenses and also recorded a liability on the balance sheet related to these costs which will be settled in
shares.
The
shares issued both pursuant to the 2014 Plan and outside the 2014 Plan have generally been fully vested and contain provisions
with respect to salability pursuant to lock up agreements ranging from 18 to 24 months from the award date.
The
Company recognizes stock compensation expense generally upon the grant date and over the period of vesting or period that services
will be provided. Compensation associated with shares issued or to be issued to consultants and other non-employees is recognized
over the expected service period beginning on the measurement date which is generally the time the Company and the service provider
enter into a commitment whereby the Company aggress to grant shares in exchange for the services to be provided.
MoviePass,
Inc.
MoviePass
maintained the 2011 Equity Incentive Plan (the “2011 Plan”) during 2017. The 2011 Plan provides for the grant of up
to 46,200,097 shares of common stock for issuance as non-statutory or incentive stock options, stock appreciation rights, restricted
stock and restricted stock units to the employees, officers, directors, or consultants of MoviePass. The 2011 Plan is administered
by the Board of Directors of MoviePass, who select the individuals to whom options will be granted, determines the number of options
to be granted, and the term and exercise price if each option. Stock options granted pursuant to the terms of the 2011 Plan generally
cannot be granted with an exercise price of less than 100% of the fair market value on the date of grant. The term of the options
granted under the 2011 Plan cannot be greater than 10 years. Options vest at varying rates generally over three to five years
along with performance based options.
For the period December
11, 2017 (the MoviePass acquisition date) through December 31, 2017, there was no option activity relating to the 2011 Plan. The
following table reflects the outstanding options of the 2011 Plan as of December 31, 2017:
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Options for Common Shares
|
|
|
Exercise Price
|
|
|
Remaining Contractual Term
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding as of December 31, 2016
|
|
|
17,553,242
|
|
|
$
|
0.04
|
|
|
|
9.62
|
|
|
$
|
-
|
|
Granted 2017
|
|
|
12,477,623
|
|
|
|
0.26
|
|
|
|
|
|
|
|
|
|
Exercised 2017
|
|
|
(193,583
|
)
|
|
|
0.06
|
|
|
|
|
|
|
|
|
|
Forfeited, cancelled, expired
|
|
|
(1,440,854
|
)
|
|
|
0.04
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2017
|
|
|
28,396,428
|
|
|
$
|
0.14
|
|
|
|
9.13
|
|
|
$
|
8,313,684
|
|
The Company recognized stock compensation
expense of $204,685 for the period December 11, 2017 (the acquisition date of MoviePass) to December 31, 2017. This amount is included
in selling, general, and administrative expenses in the consolidated statement of operations.
No
options were granted during the period from December 11, 2017 (the acquisition date of MoviePass, Inc.) to December 31, 2017.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
The
following table summarizes additional information regarding the outstanding and exercisable options granted pursuant to the MoviePass
2011 Plan.
|
|
|
Vested Options outstanding
|
|
|
All Options Outstanding
|
|
Exercise
Price
|
|
|
Number of
Options
|
|
|
Weighted Average
Remaining Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
Number of
Options
|
|
|
Weighted Average
Remaining Term
|
|
|
Aggregate
Intrinsic Value
|
|
$
|
0.240
|
|
|
|
241,818
|
|
|
|
5.44
|
|
|
$
|
45,945
|
|
|
|
241,818
|
|
|
|
5.44
|
|
|
$
|
45,945
|
|
$
|
0.040
|
|
|
|
10,278,210
|
|
|
|
8.81
|
|
|
|
4,008,502
|
|
|
|
16,308,570
|
|
|
|
8.81
|
|
|
|
6,360,342
|
|
$
|
0.430
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,430,182
|
|
|
|
9.93
|
|
|
|
-
|
|
$
|
0.048
|
|
|
|
70,481
|
|
|
|
5.08
|
|
|
|
26,924
|
|
|
|
370,198
|
|
|
|
4.47
|
|
|
|
141,416
|
|
$
|
0.080
|
|
|
|
2,447,725
|
|
|
|
9.62
|
|
|
|
856,704
|
|
|
|
5,045,660
|
|
|
|
9.62
|
|
|
|
1,765,981
|
|
|
Total
|
|
|
|
13,038,234
|
|
|
|
|
|
|
$
|
4,938,075
|
|
|
|
28,396,428
|
|
|
|
|
|
|
$
|
8,313,684
|
|
16.
|
Concentration
of Credit Risk
|
Consulting
As of December 31,
2017 and December 31, 2016, respectively, 4 customers accounted for 90.1% and 4 customers accounted for 91.3% of consulting revenues.
As of December 31,
2017 and December 31, 2016, respectively, 4 customers accounted for 62.6% and 3 customers accounted for 62.2% of consulting accounts
receivables.
As of December 31,
2017 and December 31, 2016, respectively, 3 vendors accounted for 82.7% and 1 vendor accounted for 88.7% of consulting accounts
payables.
Technology
As of December 31,
2017 and December 31, 2016, respectively, 3 vendors accounted for 60.8% and 4 vendors accounted for 90.8% of technology accounts
payables.
Subscription
As of December 31,
2017 and December 31, 2016, respectively, 2 customers accounted for 100.0% for subscription accounts receivables.
As of December 31,
2017 and December 31, 2016, respectively, 1 vendor accounted for 41.0% and 4 vendors accounted for 63.6% of subscription accounts
payables.
17.
|
Commitments
and Contingencies
|
The Company’s operating lease commitments at December 31, 2017 are comprised of the following:
|
|
Payments due by period
|
|
Less than 1 year
|
|
$
|
73,503
|
|
1 to 3 years
|
|
|
844,174
|
|
3 to 5 years
|
|
|
347,985
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,265,662
|
|
In
addition, the Company’s Indian subsidiary has an office in Bangalore, India at a leased facility located at 3rd Floor, Beta
Block, Number 7 Sigma Tech Park, Varthur Kodi, Bangalore 560066. This lease was amended on September 26, 2017 to extend the duration
of the lease until September 30, 2019.
The Company’s
executive office lease is subject to escalations based on increases in real estate taxes and operating expenses, all of which are
charged to rent expense. The lease agreement expires in June 2022. Rent expense was $298,758, and $261,016 for the years ended
December 31, 2017 and 2016, respectively.
In April 2017, Zone
signed a three-year lease agreement for office space in Miami. The lease term began in May 2017 and expires in April 2020 and requires
monthly rent payments of $5,026 for the first 12 months, $5,177 for the next 12 months, and $5,332 for the last 12 months of the
lease.
As
of December 31, 2017, the Company does not have any “Off Balance Sheet Arrangements”.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Legal
Proceeding:
On August 24, 2016, 3839
Holdings LLC (“3839 Holdings”) filed a summons and complaint in the Supreme Court of the State of New York, New York
County, against Theodore Farnsworth (“Mr. Farnsworth”), Highland Holdings Group, Inc. (“HHGI”) and Zone
Technologies, Inc., collectively referred to as the “Zone Defendants”. The claims arise out of 3839 Holdings’
purchase of a 10% interest in HHGI and an unsuccessful real estate investment. The Complaint asserted claims for: (i) breach of
contract, breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty against Mr. Farnsworth and
HHGI; (ii) unjust enrichment against Mr. Farnsworth and Zone; (iii) fraudulent conveyance against all of the Zone Defendants;
and (iv) alter ego liability against Mr. Farnsworth for HHGI’s obligations. The suit also sought, as part of any final relief
it may obtain after trial, an injunction against the merger between Zone and the Company, along with an award of attorneys’
fees. On or about December 7, 2016, 3839 Holdings amended the complaint to add the Company as a defendant, alleging claims against
the Company for unjust enrichment, fraudulent conveyance, aiding and abetting a fraudulent conveyance, tortious interference with
contract, permanent injunction and attorneys’ fees and cost. 3839 Holdings sought compensation from the Company and the
Zone Defendants in an amount of no less than $3,000,000 plus prejudgment interest, attorney’s fees and costs and expenses.
3839 Holdings is also sought an injunction to prevent the Company and the Zone Defendants from transferring or disposing of assets.
On November 24, 2017, the Supreme Court of the State of New York granted the motion to dismiss filed by Zone and the Company,
and all claims asserted by 3839 Holdings against Zone and the Company have been dismissed, however, 3839 Holdings is appealing
the dismissal.
18.
|
Transactions
with Related Parties
|
Gadiyaram
Consulting Agreement
On
October 5, 2017, the Company entered into a consulting agreement (the “Consulting Agreement”) with Mr. Muralikrishna
Gadiyaram (the “Consultant”), a director of Helios for a period of two years from the agreement date (the “Consulting
Term”). The Consulting Agreement formalized the arrangement of the consulting services without compensation since the acquisition
of Zone. Such fees have been accrued and paid by the Company since January 1, 2017. Mr. Gadiyaram will continue to provide guidance
to the Company and Zone relating to the further development of the respective businesses and technologies. In addition to the
aforementioned service, if requested by the Company, Mr. Gadiyaram will provide guidance with respect to the development of any
businesses or technologies that the Company or Zone may acquire during the Consulting Term, including, but not limited to, MoviePass.
Pursuant to the Consulting Agreement, the Consultant will receive fees in the amount of $18,750 per month in cash. Following the
execution of the Consulting Agreement, the Company paid the consultant the accrued consulting fees for the period January1, 2017
through November 30, 2017. The amount payable to Mr. Gadiyaram as of December 31, 2017 was approximately $18,750.
Transactions
with Helios and Matheson Information Technology Ltd. (“HMIT”)
In
September 2010, the Company entered into an amendment of a Memorandum of Understanding (the “MOU”) with its former
parent, HMIT, which was subsequently amended in August 2013. Pursuant to the MOU, HMIT agreed to make available to the Company
facilities of dedicated Off-shore Development Centers (“ODCs”) and also render services by way of support in technology,
client engagement, and management and operation of the ODCs for the Company. The Company furnished HMIT with a security deposit
of $2,000,000 to cover any expenses, claims or damages that HMIT may have incurred while discharging its obligations under the
MOU and also to cover the Company’s payable to HMIT. As of December 31, 2015, the Company had a receivable from HMIT in
the amount of $182,626 which represents amounts paid on behalf of HMIT, for which the Company fully reserved.
In
August 2014, the Company entered into a Professional Service Agreement with HMIT (the “PSA”), which documented ongoing
services provided by HMIT from February 24, 2014. Pursuant to the PSA, HMIT hired employees in India and provided infrastructure
services for those employees to facilitate the operations of those of the Company’s clients who needed offshore support
for their businesses. For the services the Company paid the costs incurred by HMIT for the employees it hired to provide the services
and a fixed fee for infrastructure support. Beginning October 2014, all employees were transferred to the payroll of the Company’s
subsidiary, Helios and Matheson Global Services Pvt. Ltd., and HMIT was paid only for the infrastructure support it provided until
August 2015. Beginning September 2015, Helios and Matheson Global Services Pvt. Ltd. leased an office and took over infrastructure
support from HMIT. For the year ended December 31, 2017 and 2016 the Company did not have any revenue from services provided with
offshore support of HMIT.
HMIT
ceased providing services under the MOU and PSA during the third quarter of 2015. The Company ensured continued uninterrupted
services to its clients by taking on infrastructure costs relating to the lease and employees.
The
Company determined to provide for a reserve in its September 30, 2015 and December 31, 2015 financial statements in the amount
of $2,300,000 (the “Reserve Amount”) due to an uncertainty relating to the ability of HMIT to (i) return the security
deposit held by HMIT in connection with the MOU and (ii) pay approximately $344,000 in reimbursable expenses and advances pursuant
to the PSA.
On
January 21, 2016, HMIT became subject to a liquidation order by an Indian court resulting from creditors’ claims against
HMIT. On February 15, 2016, the High Court of Judicature at Madras (Civil Appellate Jurisdiction) issued an order of interim stay
of the liquidation order. HMIT continues to await a decision from the High Court of Judicature relating to this matter. If HMIT
becomes subject to liquidation, the Company would likely not be able to collect the full amount of $2,300,000 reserved in its
September 30, 2016 and December 31, 2016 financial statements.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
The
following is a summary of the Company’s warrant activity during the year ended December 31, 2017:
|
|
Warrant Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life Years
|
|
Outstanding/exercisable – December 31, 2016
|
|
|
70,714
|
|
|
$
|
6.26
|
|
|
|
4.87
|
|
Granted
|
|
|
12,755,539
|
|
|
|
6.47
|
|
|
|
4.90
|
|
Exercised
|
|
|
(3,194,665
|
)
|
|
|
4.33
|
|
|
|
4.71
|
|
Total
|
|
|
9,631,588
|
|
|
$
|
6.04
|
|
|
|
4.86
|
|
Operating
segments are defined as components of an enterprise about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in
assessing performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer.
The Company operates in three segments, Consulting, Technology, and Subscription. During the year ended December 31, 2016, the
Company operated two segments.
The
Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes the
Company’s segment information for the following balance sheet dates presented, and for the year ended December 31, 2017
and 2016, (Subscription segment information from the date of acquisition through December 31, 2017):
|
|
For the Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Consulting
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,512,300
|
|
|
$
|
6,759,700
|
|
Cost of revenue
|
|
|
3,678,294
|
|
|
|
4,860,927
|
|
Gross profit
|
|
|
834,006
|
|
|
|
1,898,773
|
|
Total operating expenses
|
|
|
28,364,072
|
|
|
|
3,437,283
|
|
Loss from operations
|
|
|
(27,530,066
|
)
|
|
|
(1,538,510
|
)
|
Total other expense
|
|
|
(94,686,108
|
)
|
|
|
(5,299,401
|
)
|
Provision for income taxes
|
|
|
(49,932
|
)
|
|
|
14,665
|
|
Total net loss
|
|
$
|
(122,266,106
|
)
|
|
$
|
(6,823,246
|
)
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
15,587,592
|
|
|
|
557,825
|
|
Loss from operations
|
|
|
(15,587,592
|
)
|
|
|
(557,825
|
)
|
Total other expense
|
|
|
(67,958
|
)
|
|
|
-
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Total net loss
|
|
$
|
(15,655,550
|
)
|
|
$
|
(557,825
|
)
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
5,929,267
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
16,860,415
|
|
|
|
-
|
|
Gross loss
|
|
|
(10,931,148
|
)
|
|
|
-
|
|
Total operating expenses
|
|
|
1,967,978
|
|
|
|
-
|
|
Loss from operations
|
|
|
(12,899,126
|
)
|
|
|
-
|
|
Total other expense
|
|
|
(460
|
)
|
|
|
-
|
|
Provision for income taxes
|
|
|
(3,600
|
)
|
|
|
-
|
|
Total net loss
|
|
$
|
(12,903,186
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Consulting
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
569,886
|
|
|
$
|
1,095,732
|
|
Accounts receivable
|
|
$
|
332,753
|
|
|
$
|
410,106
|
|
Unbilled receivables
|
|
$
|
-
|
|
|
$
|
45,207
|
|
Prepaid expenses and other current assets
|
|
$
|
3,382,127
|
|
|
$
|
554,338
|
|
Property and equipment
|
|
$
|
96,464
|
|
|
$
|
34,368
|
|
Intangible assets, net
|
|
$
|
-
|
|
|
$
|
-
|
|
Deposits and other assets
|
|
$
|
129,119
|
|
|
$
|
59,189
|
|
Accounts payable and accrued expenses
|
|
$
|
2,088,867
|
|
|
$
|
1,196,668
|
|
Liabilities to be settled in stock
|
|
$
|
20,875,045
|
|
|
$
|
-
|
|
Convertible notes payable
|
|
$
|
3,611,627
|
|
|
$
|
31,425
|
|
Warrant liability
|
|
$
|
67,288,800
|
|
|
$
|
230,663
|
|
Derivative liability
|
|
$
|
4,834,462
|
|
|
$
|
977,129
|
|
Deferred revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,933,765
|
|
|
$
|
1,651,508
|
|
Prepaid expenses and other current assets
|
|
$
|
21,666
|
|
|
$
|
42,833
|
|
Property and equipment
|
|
$
|
95,301
|
|
|
$
|
10,844
|
|
Intangible assets, net
|
|
$
|
2,829,295
|
|
|
$
|
6,004,691
|
|
Goodwill
|
|
$
|
-
|
|
|
$
|
4,599,969
|
|
Deposits and other assets
|
|
$
|
10,052
|
|
|
$
|
-
|
|
Accounts payable and accrued expenses
|
|
$
|
607,622
|
|
|
$
|
134,450
|
|
Liabilities to be settled in stock
|
|
$
|
445,660
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Subscription
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,445,742
|
|
|
$
|
-
|
|
Accounts receivable
|
|
$
|
27,137,466
|
|
|
$
|
-
|
|
Prepaid expenses and other current assets
|
|
$
|
154,018
|
|
|
$
|
-
|
|
Property and equipment
|
|
$
|
42,270
|
|
|
$
|
-
|
|
Intangible assets, net
|
|
$
|
25,707,487
|
|
|
$
|
-
|
|
Goodwill
|
|
$
|
79,137,177
|
|
|
$
|
-
|
|
Deposits and other assets
|
|
$
|
8,000
|
|
|
$
|
-
|
|
Accounts payable and accrued expenses
|
|
$
|
10,447,514
|
|
|
$
|
-
|
|
Deferred revenue
|
|
$
|
54,425,630
|
|
|
$
|
-
|
|
The
Company
accounts for income taxes using the liability method.
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Deferred
tax assets and (liabilities) consist of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Licensing revenues
|
|
$
|
4,144,000
|
|
|
$
|
(7,000
|
)
|
Accounts receivable reserve
|
|
|
1,000
|
|
|
|
194,000
|
|
Depreciation and amortization
|
|
|
(7,212,000
|
)
|
|
|
353,000
|
|
Investments
|
|
|
-
|
|
|
|
928,000
|
|
Other
|
|
|
132,000
|
|
|
|
1,141,000
|
|
Tax
credits
|
|
|
120,000
|
|
|
|
-
|
|
Net operating losses
|
|
|
46,126,000
|
|
|
|
9,427,000
|
|
Subtotal
|
|
|
43,311,000
|
|
|
|
12,036,000
|
|
Valuation allowance
|
|
|
(43,311,000
|
)
|
|
|
(12,036,000
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
Internal
Revenue Code Section 382 places a limitation on the utilization of federal net operating loss and other credit carry-forwards
when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percentage point change
in ownership occurs. On September 5, 2016, HMIT acquired a greater than 50 percent ownership of the Company. Additionally, on
December 11, 2017 the Company completed its acquisition of a majority interest in MoviePass, a Delaware corporation with approximately
$73 million in federal and state net operating losses. Accordingly, the actual utilization of the net operating loss carry-forwards
for tax purposes are limited annually under Code Section 382 to a percentage of the fair market value of both the Company and
MoviePass as of the date of both ownership changes.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
At December
31, 2016, the Company has total federal net operating loss carry-forwards of approximately $168 million, approximately $83 million
attributed to the Company, and approximately $90 million attributed to MoviePass, which will begin to expire in 2020. The full
utilization of the deferred tax assets in the future is dependent upon the Company's ability to generate taxable income; accordingly,
a valuation allowance has been established against the Company's net deferred tax assets. During the years ended December 31, 2017
and 2016, the valuation allowance increased by approximately $31,275,000 and $4,514,000, respectively.
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Current
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State and local
|
|
|
14,000
|
|
|
|
12,000
|
|
Foreign
|
|
|
39,532
|
|
|
|
(26,665
|
)
|
Total current
|
|
$
|
53,532
|
|
|
$
|
(14,665
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State and local
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State and local taxes net of federal tax benefit
|
|
|
-0.1
|
%
|
|
|
-0.1
|
%
|
Non-deductible expenses
|
|
|
-16.8
|
%
|
|
|
18.9
|
%
|
Foreign tax expense
|
|
|
0.1
|
%
|
|
|
-0.7
|
%
|
Non-deductible expenses
|
|
|
-19.2
|
%
|
|
|
18.9
|
%
|
Change in valuation allowance
|
|
|
1.9
|
%
|
|
|
-51.9
|
%
|
Total
|
|
|
-0.1
|
%
|
|
|
19.1
|
%
|
On December
22, 2017, the United States enacted the Tax Act, which made significant changes to the U.S. federal income tax law. Set forth below
is a discussion of certain provisions of the Tax Act and our preliminary assessment of the effect of such provisions on the Company's
results of operations, cash flows and consolidated financial statements.
The
Tax Act will affect 2018 and forward, including but not limited to a reduction in the federal corporate rate from 35.0% to 21.0%,
elimination of the corporate alternative minimum tax, a new limitation on the deductibility of certain executive compensation,
limitations on net operating losses generated after December 31, 2017 and various other items. We do not expect these changes
to have a material impact on our financial statements due to the accumulated net operating losses in the U.S.
The
Tax Act provides for a one-time “deemed repatriation” of accumulated unrepatriated foreign earnings determined as
of November 2, 2017, or December 31, 2017, whichever is greater. We do not expect to be subject to this provision due to availability
of federal net operating losses to offset any repatriation tax. in our foreign earnings for tax purposes. The Tax Act also created
a new requirement that certain income earned by controlled foreign corporations must be included currently in the gross income
of the U.S. shareholder under the Global Intangible Low-Taxed (GILTI) provision. We do not expect that any future foreign earnings
will be subject to GILTI due to our federal net operating losses.
In
December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which addresses how a company recognizes
provisional amounts when a company does not have the necessary information available, prepared or analyzed (including computations)
in reasonable detail to complete its accounting for the effect of the changes in the Act. SAB 118 provides for a measurement period
that should not extend beyond one year from the Act enactment date for companies to complete the accounting under Accounting Standards
Codification Topic 740, Income Taxes (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax
effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting
for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record
a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be
included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were
in effect immediately before the enactment of the Act. Based on our initial analysis of the Tax Act, the Company has made reasonable
estimates of its 2017 impact. As a result of the federal corporate tax rate reduction from 35% to 21%, we re-measured certain
deferred tax assets and liabilities, which resulted in a reduction in our DTA of approximately $20.5 million, that was offset
by a decrease in our valuation allowance. As guidance and technical corrections, if any, are provided in the upcoming quarters,
the Company will adjust its provisional estimates as required.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Senior
Convertible Bridge Note Financing
On
January 23, 2018 (the “Subscription Date”), pursuant to a securities purchase agreement entered into by the Company
and an institutional investor (the “Buyer”), the Company sold and issued senior convertible notes in the aggregate
principal amount of $60,000,000 (each, a “Note” and collectively, the “Notes”), consisting of (i) a Series
A-1 Senior Bridge Subordinated Convertible Note in the aggregate principal amount of $25,000,000 (the “Series A-1 Note”)
and (ii) a Series B-1 Senior Secured Bridge Convertible Note in the aggregate principal amount of $35,000,000 (the “Series
B-1 Note”) for consideration consisting of (i) a cash payment in the aggregate amount of $25,000,000 (the “Cash Amount”),
and (ii) a secured promissory note payable by the Buyer to the Company (the “Investor Note”) in the aggregate principal
amount of $35,000,000 (the “Financing”). The date on which the Notes were issued is referred to as the “Closing
Date.”
Unless
earlier converted or redeemed, the Notes will mature on the second anniversary of the Closing Date. The Company is required to
redeem the Notes (i) at the option of the Buyer from and after June 7, 2018; (ii) at the option of the Buyer if the Company completes
a subsequent public or private offering of debt or equity securities, including equity-linked securities (subject to certain excluded
issuances); (iii) upon the occurrence of an Event of Default, including a Bankruptcy Event of Default (each, as defined in the
Notes); or (iv) in the event of a Change of Control (as defined in the Notes). With the exception of a redemption required by
an Event of Default, which may be paid with cash or shares of the Company’s common stock at the election of the Buyer, the
Company will be required to redeem the Notes with cash. The Notes and the shares of common stock into which the Notes may be converted
(collectively, the “Conversion Shares”) are sometimes referred to in this report as the “Securities.”
All amounts outstanding under the Notes will be secured by the Investor Note and all proceeds therefrom. The Notes will not be
secured by, and the Investors will not have a lien on, any assets of the Company other than the Investor Note.
MoviePass
Inc. has guaranteed the obligations arising under the Notes in accordance with the terms of a Guaranty (the “MoviePass Guaranty”).
In
accordance with terms of the SPA, the Company is obligated to convene a special meeting of its stockholders on or prior to June
1, 2018, for the purpose of approving the issuance of all Securities that may be issued in connection with the Financing.
Series
A-1 Note
The
aggregate principal amount of the Series A-1 Note is $25,000,000 which will bear interest at a rate of 10% per annum.
Series
B-1 Note
Upon
issuance, the Series B-1 Note initially consisted entirely of “Restricted Principal” which is defined as that portion
of the principal amount of a Series B-1 Note that equals the outstanding principal amount of a corresponding Investor Note. The
principal amount of the Investor Note is subject to reduction through prepayments by the applicable Buyer of the Investor Note
given by the Buyer to the Company or, upon maturity or redemption of the Series B-1 Note, by netting the amount owed by the Buyer
under such Investor Note against a corresponding amount of principal to be canceled under the Buyer’s Series B-1 Note. Each
prepayment under the Investor Note will convert a corresponding amount of Restricted Principal under the Series B-1 Note into
“Unrestricted Principal” that may be converted into common stock.
The
Series B-1 Note bears interest at a rate of (i) 5.25% per annum with respect to any Restricted Principal, and (ii) 10% per annum
with respect to any Unrestricted Principal
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Payment
of Interest
Interest
on the Notes is capitalized on each quarterly interest payment date starting April 1, 2018 by adding the interest to the then
outstanding principal amount of the Notes. Interest may also be paid by inclusion in the Outstanding Amount, which is defined
in the Notes as the principal amount to be converted or redeemed, accrued and unpaid interest with respect to such principal amount,
accrued and unpaid late charges, if any, and the “Make-Whole Amount.” The “Make-Whole Amount” is defined
as the amount of any interest that, but for a conversion or redemption, would have accrued with respect to the Outstanding Amount
of principal being redeemed or converted under the Series A-1 Note and Unrestricted Principal under the Series B-1 Note, for the
period from the applicable date of conversion or redemption date through the maturity date of the Notes. No Make-Whole Amount
will be payable under the Series B-1 Note with respect to any portion of Restricted Principal after the cancellation of such Restricted
Principal pursuant to netting under the Series B-1 Note, the Investor Note or the Master Netting Agreement (as defined below),
as applicable. In the event of an event of default interest under the Notes may be increased to 15% during the first 30 days following
the occurrence and continuance of an event of default and to 18% thereafter (the “Default Rate”).
Conversion
of the Notes
The
Buyer may elect, at any time after the Company obtains approval by its stockholders of the issuance of the Company’s securities
pursuant to the November Notes (as defined below), to convert the Notes into shares of the Company’s common stock at the
Conversion Price, subject to certain beneficial ownership limitations described below. The “Conversion Price” is $11.44
per share (subject to anti-dilution adjustment as described in the Notes).
Redemption
of the Notes
Provided
there has been no Equity Conditions Failure (as defined in the Notes) and, as to the Series A-1 Note, no senior secured convertible
notes issued by the Company on August 16, 2017 (the “August Notes”) or senior convertible bridge notes issued by the
Company on November 7, 2017 (the “November Notes”) remain outstanding, and as to the Series B-1 Note, no August Notes,
November Notes, Series A-1 Note or Series B-1 Note with any Unrestricted Principal remain outstanding, the Company will have the
right to redeem all, but not less than all, of the Outstanding Amount remaining unpaid under the Notes. The portion of the Notes
subject to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. Under the
Series B-1 Note, the Company may reduce, on a dollar for dollar basis, the Restricted Principal by the surrender for cancellation
of such portion of the corresponding Investor Note equal to the amount of Restricted Principal included in the redemption.
The
Buyer has the right to require the Company to redeem the Notes (i) at the option of the Buyer from and after June 7, 2018; (ii)
if the Company completes a Subsequent Placement, as defined in the SPA; (iii) upon the occurrence of an Event of Default, including
a Bankruptcy Event of Default (as defined in the Notes); or (iv) in the event of a Change of Control. With the exception of a
redemption required by an Event of Default, which may be paid with cash or shares of the Company’s common stock at the election
of the Buyer, the Company will be required to redeem the Notes with cash.
Note
Purchase Agreement
The
Investor Note was issued as payment in full for the Series B-1 Note pursuant to the terms and conditions of a note purchase agreement
entered into by the Company and the Buyer (collectively, the “Note Purchase Agreement”).
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Investor
Note
The
Investor Note will be payable in full on the forty-second anniversary of the Closing Date, although the Buyer may prepay the Investor
Note in whole or in part, without premium or penalty, at any time. The Investor Note accrues interest at an annual rate of 0.61%.
The Buyer’s obligation to pay the Company the principal amount of the Investor Note is secured with cash, cash equivalents,
any Group of Ten (“G10”) currency and any notes or other securities issued by any G10 country having a value equal
to the principal amount of the Investor Note. The Investor Note is also subject to mandatory prepayment, in whole or in part,
at any time (i) if the Company receives a conversion notice from the Buyer in which all or any part of the principal of the Series
B-1 Note to be converted includes any Restricted Principal and (ii) the Buyer receives a confirmation from the Company’s
transfer agent that it has been irrevocably instructed by the Company to deliver to the Buyer the shares of the Company’s
common stock to be issued pursuant to the conversion notice.
February
Public Offering
On
February 13, 2018, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Canaccord
Genuity Inc., on behalf of itself and as representative of the underwriters named therein (the “Underwriters”), pursuant
to which the Company agreed to issue and sell to the Underwriters in a best-efforts underwritten public offering (the “Offering”)
of up to approximately $105 million in gross proceeds of securities of the Company including (A) 7,425,000 Series A-1 units (the
“Series A-1 Units”), with each Series A-1 Unit consisting of (i) one share (the “Shares”) of the Company’s
common stock, par value $0.01 per share (the “Common Stock”), and (ii) one Series A-1 warrant to purchase one share
of Common Stock (the “Series A-1 Warrants”); and for those purchasers whose purchase of Series A-1 Units would result
in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 9.99% of the Company’s
outstanding Common Stock following the consummation of the Offering, (B) 11,675,000 Series B-1 units (the “Series B-1 Units”,
and together with the “Series A-1 Units”, the “Units”), consisting of (i) one pre-funded Series B-1 warrant
to purchase one share of Common Stock (the “Series B-1 Warrants”, and together with the Series A-1 Warrants, the “Warrants”)
and (ii) one Series A-1 Warrant. The Units were sold at a price to the public equal to $5.50 per Unit.
Each
Warrant is exercisable at any time on or after the issuance date until the five-year anniversary of the issuance date. Each Series
A-1 Warrant is exercisable at a price of $6.50 per share of Common Stock. Each Series B-1 Warrant has an aggregate exercise price
of $5.50 per share of Common Stock, all of which will be pre-funded except for a nominal exercise price of $0.001 per share of
Common Stock. The Warrants will not be listed on The NASDAQ Capital Market or any other securities exchange. As of the date of
this report, all Series B-1 Warrants have been exercised.
The
Company received approximately $96,817,200 in net proceeds from the sale of the Units, after deducting underwriting discounts
and commissions equal to $5,882,800 and estimated offering expenses of approximately $450,000, not taking into account any exercise
of the Warrants.
New
Subscription Agreement with MoviePass
December
19, 2017 through February 20, 2018, Helios provided cash advances to MoviePass to support MoviePass’ working capital and
operational requirements, as well as to support the expansion of MoviePass’ business plans and objectives. The total amount
advanced by Helios to MoviePass during this period totaled $55,525,000 (the “Advance”).
On
March 8, 2018, the Company entered into a Subscription Agreement with MoviePass (the “March 2018 Agreement”), pursuant
to which, in lieu of MoviePass repaying the Advance, MoviePass agreed to sell to the Company, and the Company agreed to accept,
an amount of MoviePass Common Stock equal to 18.79% of the total then outstanding MoviePass Common Stock (excluding shares underlying
MoviePass options and warrants) (the “March 2018 MoviePass Purchased Shares”), based on a pre-money valuation of MoviePass
of $240,000,000 as of December 31, 2017. Pursuant to the March 2018 Agreement, MoviePass also agreed to issue to Helios, in addition
to the March 2018 MoviePass Purchased Shares, without payment of additional consideration by Helios, for purposes of providing
Helios with anti-dilution protection with respect to Helios’ prior equity investments in MoviePass, an amount of shares
of MoviePass Common Stock that caused Helios’ total ownership of the outstanding shares of MoviePass Common Stock (excluding
shares underlying MoviePass options and warrants), together with the March 2018 MoviePass Purchased Shares, to equal 81.2% as
of March 8, 2018.
In addition, from
March 1, 2018 through April 12, 2018, the Company advanced a total of $35,000,000 to MoviePass (the “Second Advance”).
On April 16, 2018, the Company entered into an additional Subscription Agreement with MoviePass (the “April 2018 Agreement”),
pursuant to which, in lieu of repayment of the Second Advance, MoviePass agreed to sell to the Company an amount of MoviePass Common
Stock equal to 10.6% of the total then outstanding MoviePass Common Stock (excluding shares underlying MoviePass options and warrants)
(the “April 2018 MoviePass Purchased Shares”), based on a pre-money valuation of MoviePass of $295,000,000 as of March
31, 2018. Pursuant to the April 2018 Agreement, MoviePass also agreed to issue to the Company, in addition to the April 2018 MoviePass
Purchased Shares, without payment of additional consideration by the Company, for purposes of anti-dilution, an amount of shares
of MoviePass Common Stock that caused the Company’s total ownership of the outstanding shares of MoviePass Common Stock (excluding
shares underlying MoviePass options and warrants), together with the April 2018 MoviePass Purchased Shares, to equal 91.8% as of
March 8, 2018.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Consolidated Financial Statements
Moviefone
Acquisition
Asset
Purchase Agreement
On
April 4, 2018, the Company entered into an Asset Purchase Agreement (the “Moviefone Purchase Agreement”) with Oath
Inc. (formerly, AOL Inc.), a Delaware corporation and subsidiary of Verizon Communications (“Oath”), pursuant to which
the Company completed the acquisition from Oath of certain products, rights, technology, contracts, equipment, data and other
assets related to the “Moviefone” brand (the “Moviefone Assets”). The purchase price for the transaction
consisted of the following: (a) $1.0 million in cash, (b) the issuance of 2,550,154 shares of the Company’s common stock
(the “Closing Shares”), and (c) the issuance of warrants (the “Closing Warrants”) to purchase 2,550,154
shares of the Company’s common stock at an exercise price of $5.50 per share (the “Moviefone Warrant Shares,”
and together with the Closing Warrants and the Closing Shares, the “Closing Securities”). In addition, pursuant to
the Moviefone Purchase Agreement, the Company assumed certain specified liabilities related to the Moviefone Assets. The Moviefone
Purchase Agreement contains customary representations, warranties, covenants, and indemnification provisions. In connection with
the Moviefone Purchase Agreement, the Company and Oath also entered into a Lock-up Agreement, Registration Rights Agreement, Transition
Services Agreement (the “Services Agreement”), Advertising Representative Agreement (the “Representative Agreement”),
and other ancillary agreements.
Articles
of Incorporation
On
February 5, 2018, the Company’s stockholders approved an amendment to the Company’s Certificate of Incorporation to
increase the number of authorized shares of common stock from 100,000,000 to 500,000,000 shares (the “Charter Amendment”).
Following stockholder approval of the Charter Amendment, a Certificate of Amendment to the Company’s Certificate of Incorporation
was filed with the Secretary of State of the State of Delaware on February 8, 2018, at which time the Charter Amendment became
effective.
Lock-Up
Agreement
On
March 14, 2018, Helios and Matheson Analytics Inc. entered into a letter agreement (the “Lock-Up Agreement”) with
Theodore Farnsworth, its Chief Executive Officer and Chairman of the Board of Directors, pursuant to which Mr. Farnsworth agreed
that he would not sell or transfer any shares of the Company’s common stock (the “Common Stock”) held by him
for a period of 24 months from the date of the Lock-Up Agreement, subject to certain permitted transfers as gifts, by will or
intestate succession or to a family trust, provided that any such transfer is not a disposition for value and the transferee agrees
to be bound by the Lock-Up Agreement. Mr. Farnsworth entered into the Lock-Up Agreement upon receipt from the Company of the Bonus
(as defined below in Item 5.02 of this Current Report). The above discussion does not purport to be a complete description of
the Lock-Up Agreement and is qualified in its entirety by reference to the full text of the Lock-Up Agreement, which is attached
as Exhibit 10.1 to this Current Report and incorporated herein by reference.
Employment
Agreement with Stuart Benson
On
January 18, 2018, the Company entered into an employment agreement (the “Agreement”) with Stuart Benson, its
Chief Financial Officer. The term of the Agreement will expire on December 31, 2020 and, following the expiration of the
initial term, will be automatically renewed for additional consecutive terms of one year, unless either the Company or Mr.
Benson objects to the renewal at least ninety days prior to the commencement of the renewal term. The contract is subject to
termination provisions, please refer to the respective 8-K for more details.
Compensation
Base
Salary.
Pursuant to the Agreement, Mr. Benson’s base salary will be $275,000 per year, retroactive to January 1, 2018,
and will be increased on the first day of each calendar year thereafter in an amount that is no less than 7% of the base salary.
Annual
Bonus.
For 2017, Mr. Benson will receive a performance bonus consisting of (i) cash in the amount of $150,000, payable
no later than January 31, 2018; (ii) 300,000 shares of the Company’s common stock for extraordinary services related to
the Company’s acquisition of a majority stake in MoviePass Inc.; and (iii) 100,000 shares of the Company’s common
stock for outstanding performance of his general duties in 2017. The shares of common stock will vest in their entirety on
February 15, 2019 and will be issued no later than March 15, 2018. For each subsequent year of the term, Mr. Benson may
receive an annual bonus, made up of cash and shares of the Company’s common stock, as determined in the sole discretion
of the Board based on its assessment of Company and individual performance in relation to performance targets, a subjective
evaluation of Mr. Benson’s performance or such other criteria as may be established by the Board. The annual cash
target bonus will be 50% of Mr. Benson’s base salary and, if granted, the annual award of shares of the Company’s
common stock will be as follows: (i) for services rendered during 2018, 300,000 shares; (ii) for services rendered during
2019, 325,000 shares; and (iii) for services rendered during 2020, 400,000 shares. The shares of common stock included in the
annual bonus, if any, will vest ratably at the end of each of the six calendar quarters subsequent to the calendar quarter in
which the grant is made.
Grant
of Common Stock.
The Company will grant to Mr. Benson an award of 600,000 shares of common stock, subject to the terms
of an award agreement. The shares shall vest in their entirety on February 15, 2019, eighteen months following August 15,
2017, the date on which the Company entered into a Securities Purchase Agreement to acquire a majority stake in MoviePass
Inc., which contemplated that the Company would enter into an employment agreement with Mr. Benson prior to the closing under
the MoviePass Securities Purchase Agreement.
Increase of 2014 Equity Incentive
Plan
On February 5, 2018 at a Special Meeting
of the Stockholders, the Company approved an amendment to the Company’s 2014 Equity Incentive Plan (the “2014 Plan”)
to (i) increase the aggregate number of shares of common stock authorized for issuance thereunder by 1,875,000 to an aggregate
of 3,000,000 shares and (ii) account for an annual automatic increase in the number of shares of common stock authorized for issuance
thereunder by the lesser of (A) 3,000,000 shares of the Company’s common stock or the equivalent of such number of shares
after the administrator of the 2014 Plan, in its sole discretion, has interpreted the effect of any stock split, stock dividend,
combination, recapitalization or similar transaction; (B) a number of shares of common stock equal to 5% of the Company’s
common stock outstanding on January 2nd of each year; and (C) an amount determined by the Company’s Board of Directors (Proposal
1).
MoviePass Ventures
In April 2018, MoviePass Ventures
entered into an Acquisition Co-Financing and Distribution Agreement with Orchard Enterprises NY, Inc. for the purpose of co-funding
the acquisition, advertising and promotion of MoviePass Ventures’ first film, titled “American Animals”, which
premiered at the 2018 Sundance Film Festival.
F-31