Notes to Consolidated Financial Statements
Helios and Matheson Analytics Inc. (“Helios and Matheson” or the “Company”) was incorporated in the state of New York in February of 1983 and became a public company in August of 1997. In October of 2009, Helios and Matheson changed its state of incorporation from New York to Delaware. The Company is headquartered in New York, New York and also has an office in Bangalore, India. The Company provides a wide range of information technology (“IT”) consulting, custom application development and solutions and analytics services to Fortune 1000 companies and other large organizations. The Company supports all major computer technology platforms and supports client IT projects by using a broad range of third-party software applications. The Company now offers its clients an enhanced suite of services of predictive analytics with technology at its foundation enriched by data science.
Merger with Zone Technologies, Inc.
On November 9, 2016, the Company completed its previously disclosed merger with Zone Technologies, Inc. (“Zone”) pursuant to the Agreement and Plan of Merger, dated as of July 7, 2016, entered into by the Company, Zone Acquisition, Inc. and Zone, 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.
On the Closing Date the Company issued 1,740,000 shares of the Company’s common stock as merger consideration, 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, Inc., the Company’s wholly-owned subsidiary, was merged into Zone, with Zone surviving the merger as the Company’s wholly-owned subsidiary.
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.
Change in Controlled Company Status
Prior to November 9, 2016, the Company met the definition of a “Controlled Company” as defined by Rule 5615(c) of the NASDAQ Rules. A “Controlled Company” is defined in Rule 5615(c) as a company of which more than 50% of the voting power for the election of directors is held by an individual, group or another company. Certain NASDAQ requirements do not apply to a “Controlled Company”, including requirements that: (i) a majority of its Board of Directors must be comprised of “independent” directors as defined in NASDAQ’s rules; and (ii) the compensation of officers and the nomination of directors be determined in accordance with specific rules, generally requiring determinations by committees comprised solely of independent directors or in meetings at which only the independent directors are present. On November 9, 2016, the Company’s wholly-owned subsidiary, Zone Acquisition, Inc., merged with and into Zone Technologies, Inc. As a result of the issuance of the merger consideration, the Company no longer meets the definition of a Controlled Company.
2)
|
GOING CONCERN ANALYSIS
|
Going Concern Analysis
The Company had a net loss of $7,381,071 and $2,110,117 for the years ended December 31, 2016 and 2015, respectively. As a result, these conditions had raised substantial doubt regarding our ability to continue as a going concern. However, as of December 31, 2016, we had cash and working capital of $2,747,240 and $1,229,389, respectively. During the year ended December 31, 2016, the Company used cash from operations of $2,134,313. In addition, as of the date the financial statements were issued, the Company has notes receivable of $6,900,000 from a convertible note holder. Management believes that current cash on hand coupled with the notes receivable makes it probable that the Company’s cash resources will be sufficient to meet our cash requirements through approximately April 2018. If necessary, management also determined that it is probable that external sources of debt and/or equity financing could be obtained based on management’s history of being able to raise capital coupled with current favorable market conditions. As a result of both management’s plans and current favorable trends in improving cash flow, the Company concluded that the initial conditions which raised substantial doubt regarding the ability to continue as a going concern have been alleviated. Therefore, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein. While we believe in the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and control operating expenses.
3)
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
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. Actual results could differ from those estimates.
Principles of Consolidation
All intercompany transactions and balances have been eliminated.
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.
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 ASC Paragraph 360-10-35-17, 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.
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
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. The Company performs the annual assessment on December 31.
In accordance with ASC 350–20 “
Goodwill
”, the Company is able to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit.
There were no impairment charges recognized during the years ended December 31, 2016 and 2015.
Intangible Assets, net
Intangible assets consist of technology, trademarks and broker relationships. 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 1 to 7 years.
During the year ended December 31, 2016, the Company recorded amortization expense of $246,509. The Company did not have any intangible assets as of December 31, 2015.
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.
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.
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.
Advertising
The Company expenses advertising costs when incurred.
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 income.
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.
Earnings (Loss) 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 FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be 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 arrangement, stock options or warrants.
The following table shows the outstanding dilutive common shares excluded from the diluted net loss per share calculation as they were anti-dilutive:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Warrants
|
|
|
70,714
|
|
|
|
-
|
|
Conversion features on convertible notes
|
|
|
511,989
|
|
|
|
-
|
|
Total potentially dilutive shares
|
|
|
582,703
|
|
|
|
-
|
|
Segment reporting
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. Our chief operating decision-making group is composed of the chief executive officer and chief financial officer. We operate in two operational segments, consulting and technology. Certain corporate expenses are not allocated to segments.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
Recent accounting pronouncements
In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle (issued as ASU 2014-09 by the FASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating this standards impact on its consolidated financial statements and disclosures.
In August 2014, the FASB Accounting Standards Update (“ASU”) 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.”
ASU 2014-15 provides guidance on management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.
The amendments in ASU 2014-15 are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 had no material effect on its financial position or results of operations.
In March 2015, the FASB issued ASU No. 2015-03, “
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”
. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments is permitted for financial statements that have not been previously issued. The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on the financial statement line items (i.e., debt issuance cost asset and the debt liability). The Company adopted ASU 2015-03 during the year ended December 31, 2016. The adoption did not have a material effect on the Company’s 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. The adoption of ASU 2016-01 is not expected to have a material impact on our financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842).”
Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-06,
“Contingent Put and Call Option in Debt Instruments”
(“ASU 2016-06”). ASU 2016-06 is intended to simplify the analysis of embedded derivatives for debt instruments that contain contingent put or call options. The amendments in ASU 2016-06 clarify that an entity is required to assess the embedded call or put options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to initially assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 take effect for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016–01 to have a significant impact on its financial statements.
In April 2016, the FASB issued ASU No. 2016-09, “
Compensation – Stock Compensation
(Topic 718)”
. The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 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 (Topic 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 evaluating the impact of the new standard.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 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 evaluating the impact of the new standard.
4)
|
ZONE TECHNOLOGIES, INC. MERGER
|
On November 9, 2016, the Company completed its previously disclosed merger with Zone Technologies, Inc. (“Zone”) pursuant to the Agreement and Plan of Merger, dated as of July 7, 2016, entered into by the Company, Zone Acquisition, Inc. and Zone, 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. The Company determined the acquisition constitutes a business acquisition in accordance with the guidance of
ASC 805 “Business Combinations.”
On the Closing Date the Company issued 1,740,000 shares of the Company’s common stock as merger consideration.
The following tables summarize the fair values of the net assets/liabilities assumed and the allocation of the aggregate fair value of the purchase consideration, non–controlling interest and net liabilities to assumed identifiable and unidentifiable intangible assets:
Purchase consideration:
|
|
|
|
|
Common stock (1,740,000 shares at the transaction date fair value of $5.41 per share)
|
|
$
|
9,413,000
|
|
Liabilities assumed
|
|
|
1,574,532
|
|
Assets acquired
|
|
|
(136,343
|
)
|
Aggregate fair value of enterprise
|
|
|
10,851,169
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Net liabilities assumed
|
|
|
(1,488,476
|
)
|
Cash acquired
|
|
|
136,343
|
|
|
|
|
(1,352,133
|
)
|
Aggregate fair value of purchase consideration, non–controlling interest and net liabilities assumed allocated to intangible assets as follows:
|
|
|
|
|
Technology
|
|
|
4,270,000
|
|
Broker Relationships
|
|
|
4,200
|
|
Trademarks
|
|
|
1,977,000
|
|
Goodwill
|
|
|
4,599,969
|
|
Total purchase price allocation
|
|
$
|
10,851,169
|
|
5)
|
PREPAID EXPENSES AND OTHER CURRENT ASSETS
|
Prepaid expenses and other current assets consisted of the following at December 31, 2016 and 2015:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Customer deposits
|
|
$
|
300,199
|
|
|
$
|
-
|
|
Tax
|
|
|
187,776
|
|
|
|
74,455
|
|
Insurance
|
|
|
44,517
|
|
|
|
43,173
|
|
Professional Fees and services
|
|
|
42,833
|
|
|
|
28,147
|
|
Rent
|
|
|
13,087
|
|
|
|
20,187
|
|
Other
|
|
|
8,759
|
|
|
|
42,681
|
|
Total prepaid expenses and other current assets
|
|
$
|
597,171
|
|
|
$
|
208,642
|
|
6)
|
PROPERTY AND EQUIPMENT
|
Property and equipment on December 31, 2016 and 2015 are as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Equipment and leaseholds
|
|
$
|
106,460
|
|
|
$
|
95,506
|
|
Furniture and Fixtures
|
|
|
34,186
|
|
|
|
34,186
|
|
Software
|
|
|
167,337
|
|
|
|
167,337
|
|
|
|
|
307,983
|
|
|
|
297,029
|
|
Less: Accumulated Depreciation
|
|
|
262,771
|
|
|
|
249,144
|
|
|
|
$
|
45,212
|
|
|
$
|
47,885
|
|
Depreciation expense charged to income for the years ended December 31, 2016 and 2015 amounted to $12,870 and $13,015, respectively.
7)
|
INTANGIBLE ASSETS AND GOODWILL
|
The Company’s intangibles assets consisted of the following:
|
|
Estimated useful life
(in years)
|
|
|
December 31,
2016
|
|
Technology
|
|
|
3
|
|
|
$
|
4,270,000
|
|
Trademarks
|
|
|
7
|
|
|
|
1,977,000
|
|
Broker Relationships
|
|
|
1
|
|
|
|
4,200
|
|
Subtotal
|
|
|
|
|
|
|
6,251,200
|
|
Less: Accumulated amortization
|
|
|
—
|
|
|
|
(246,509
|
)
|
Intangible assets, net
|
|
|
|
|
|
$
|
6,004,691
|
|
The Company recorded amortization expense of $246,509 and $0 for the years ended December 31, 2016 and 2015, respectively.
The following table outlines estimated future annual amortization expense for the next five years and thereafter:
December 31,
|
|
|
|
|
2017
|
|
$
|
1,711,494
|
|
2018
|
|
|
1,707,904
|
|
2019
|
|
|
1,501,229
|
|
2020
|
|
|
284,571
|
|
2021
|
|
|
284,571
|
|
Thereafter
|
|
|
514,922
|
|
|
|
$
|
6,004,691
|
|
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, and more often if a triggering event occurs, by comparing the fair value of each reporting unit to its carrying value.
|
|
December 31,
2016
|
|
Balance as of January 1, 2016
|
|
$
|
-
|
|
Goodwill recorded on Zone Technologies, Inc Merger
|
|
|
4,599,969
|
|
Balance as of December 31, 2016
|
|
$
|
4,599,969
|
|
8)
|
SECURITIES PURCHASE AGREEMENT
|
September 7, 2016 Securities Purchase Agreement:
Terms:
On September 7, 2016 (the “Closing Date”), the Company sold and issued Senior Secured Convertible Notes (“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. The Note included an original issue discount of $301,075.
The Notes
The aggregate principal amount of the Notes is $4,301,075. Unless earlier converted or redeemed, the Notes mature 15 months from the date they were issued. The Notes bear interest at a rate of 6% per annum, subject to an increase to 12% during the first 30 days following the occurrence and continuance of an Event of Default and to 18% thereafter. Interest on the Notes will be payable in arrears commencing on December 1, 2016 and quarterly thereafter, beginning on January 1, 2017 and, so long as certain conditions, as defined in the Notes, have been satisfied, may be paid in shares of common stock at the Company’s option. The Company may also elect to pay interest in whole or in part in cash. Interest on the Notes is computed on the basis of a 360-day year and twelve 30-day months.
The Investor may, at any time, elect to convert the Convertible Notes into shares of the Company’s common stock at a conversion price, subject to certain beneficial ownership limitations. The Conversion Price is $8.075. The Company may, with the consent of the Investor, reduce the then-current Conversion Price to any amount equal to or greater than the Floor Price ($4.00) for any period of time deemed appropriate by the Company’s Board of Directors. On October 24, 2016, pursuant to Section 7(e) of the Convertible Notes, the Company notified the Investor that the Company desired to permanently lower the Conversion Price from $8.075 to the lower of (a) $5.75 (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events) and (b) the Alternate Conversion Price in effect, from time to time, effective upon the Investor’s voluntary prepayment to the Company of $1,000,000 under the Investor Note.
The Investor also has the right to convert the Convertible Notes into shares of the Company’s common stock at the Alternate Conversion Price, subject to certain beneficial ownership limitations. The Alternate Conversion Price is defined as the lowest of (i) the applicable Conversion Price as in effect on the applicable conversion date of the applicable Alternate Conversion, (ii) the greater of (I) the Floor Price ($4.00) and (II) 87% of the quotient of (x) the sum of the volume weighted average price of the Company’s common stock for each of the five consecutive trading days ending and including the trading day immediately preceding the delivery or deemed delivery of the applicable conversion notice, divided by (y) five.
On November 15, 2016 (the “Execution Date”), the Company and the Investor agreed to reduce the Conversion Price, as defined in the Convertible Notes, of $1 million in aggregate principal amount of the Convertible Notes to (A) with respect to $100,000 in aggregate principal amount of the Convertible Note converted on the Execution Date and any conversions occurring on November 16, 2016, $4.51 (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events) and (B) thereafter, with respect to the remaining Convertible Note then outstanding, the Alternate Conversion Price, as defined in the Convertible Notes (except with “80%” replacing “87%” in such definition in the Convertible Notes).
Subsequently, on December 2, 2016, the Company permanently reduced the exercise price to $4.00.
The Company accounted for the alternative conversion provisions as a derivative liability and recognized the fair value at issuance. At each balance sheet date, the feature is re-valued and the corresponding change in fair value is recorded in other income and expense.
Under certain conditions, the Company has the right to redeem all, but not less than all, of the amounts 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 110% of the amount being redeemed. In the event of a change of control, the Investors may require the Company to redeem the Notes in cash.
The Notes contain standard and customary events of default including but not limited to: (i) failure to register the Company’s common stock within certain time periods or failure to keep the registration statement effective as required by the Registration Rights Agreement; (ii) failure to maintain the listing of the Company’s common stock; (iii) failure to make payments when due under the Note; (iv) breaches of covenants and (iv) bankruptcy or insolvency.
Following an Event of Default, the Investor may require the Company to redeem all or any portion of the Notes. The redemption amount may be paid in cash or with shares of the Company’s common stock, at the election of the Investor.
The Event of Default Redemption Price will be computed as a price equal to the greater of (i) 125% of the principal, interest and late charges to be redeemed and (ii) the product of (X) the principal, interest and late charges to be redeemed divided by the Conversion Price multiplied by (Y) the product of (1) 125% multiplied by (2) the greatest Closing Sale Price of the Company’s common stock on any Trading Day during the period commencing on the date preceding such Event of Default and ending on the date the Company makes the entire payment required to be made under the Note.
In addition, following an Event of Default, the holders of the Notes will have the right to convert the Notes at the “Alternate Conversion Event of Default Price” which means, with respect to any Alternate Conversion, that price which shall be the lowest of (i) the applicable Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) 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 Conversion Notice.
The Notes prohibit the Company from entering into specified transactions involving a change of control unless the successor entity, which must be a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market, assumes in writing all of the Company’s obligations under the Note.
The Company and its wholly-owned subsidiary, HMNY Zone Loan LLC each entered into a Security and Pledge Agreement in favor of the Investor as Collateral Agent. Pursuant to such Security and Pledge Agreements, the Notes are secured by a perfected first priority security interest in the Company’s equity ownership interest in HMNY Zone Loan LLC and the Investor Note, and all of the assets of HMNY Zone Loan LLC, subject to Permitted Liens.
HMNY Zone Loan LLC also provided a Guaranty to the Investor as Collateral Agent whereby HMNY Zone Loan LLC guarantees the punctual payment of all obligations that accrue after the commencement of any insolvency proceeding of the Company, whether or not the payment of such obligations are enforceable or allowable in the insolvency proceeding, and all fees, interest, premiums, penalties, causes of actions, costs, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Note financing documents, and agrees to pay any and all costs and expenses (including counsel fees and expenses) incurred by the Collateral Agent in enforcing any rights under the Guaranty or any other Note financing document.
Under the terms of a Registration Rights Agreement with the Investor, the Company is required to register for resale the shares of common stock that are issuable upon conversion of the Notes, additional shares that could be used as payment of monthly interest plus an additional number of shares so that the total number of shares of common stock registered equals 125% of the sum of the maximum number of shares issuable upon conversion of the Notes. The Registration Rights Agreement requires the Company to file the registration statement within 30 days after the Closing Date and to have the registration statement declared effective 90 days after the Closing Date (or 120 days after the Closing Date if the registration statement is subject to review by the Securities and Exchange Commission).
The Registration Rights Agreement provides for the payment of liquidated damages of one and one-half percent (1.5%) of the product of (x) the number of shares of common stock required by the Registration Rights Agreement to be included in the registration statement and (y) the Closing Sale Price as of the Trading Day immediately prior to the date a Registration Delay Payment, defined as the failure to file the registration statement in the time required, the failure to have the registration statement declared effective in the time required, the failure to maintain the effectiveness of the registration statement or the failure to keep current public information in the marketplace.
The Company is required to keep the registration statement effective (and the prospectus contained therein available for use) pursuant to Rule 415 for resales on a delayed or continuous basis at then-prevailing market prices at all times until the earlier of (i) the date as of which the holders of the Notes may sell all of the common stock issuable pursuant thereto without restriction pursuant to Rule 144 or (ii) the date on which all of the common stock covered by the registration statement shall have been sold.
Investor Note
The Investor Note is payable in full on December 7, 2017. The Investor’s obligation to pay the Company the Purchase Price Balance pursuant to the Investor Note is secured by $3 million, in the aggregate, in cash or cash equivalents. The Investor may, at its option at any time after September 28, 2016, voluntarily prepay the Investor Note, in whole or in part. The Investor Note is also subject to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the following mandatory prepayment events:
(1) Mandatory Prepayment upon Conversion of Note – At any time the Investor has converted $1,301,075 or more in principal amount of the Note, the Investor will be required to prepay the Investor Note, on a dollar-for-dollar basis, for each subsequent conversion of the Note.
(2) Mandatory Prepayment upon Mandatory Prepayment Notices – The Company may require the Investor to prepay the Investor Note by delivering a mandatory prepayment notice to the Investor, subject to (i) the satisfaction of certain equity conditions, and (ii) the Investor’s receipt of a valid written notice by the Company electing to effect a mandatory conversion of Restricted Principal (defined as $3 million of the principal amount of the Notes), not in excess of the Maximum Mandatory Share Amount or the Maximum Mandatory Conversion Amount.
The Investor paid the entire $3 million during the three months ended December 31, 2016. On receipt of the proceeds, management bifurcated the corresponding conversion feature and recorded a derivative liability at fair value using a Monte-Carlo pricing model.
Placement Agent Note and Warrants
The aggregate principal amount of the Senior Secured Convertible Note issued to the placement agent (the “Placement Agent Note”) is $80,000. Unless earlier converted or redeemed, the Placement Agent Note matures 15 months from the date it was issued. The Placement Agent Note bears interest at a rate of 6% per annum, subject to an increase to 12% during the first 30 days following the occurrence and continuance of an Event of Default and to 18% thereafter. Interest on the Placement Agent Note will be payable in arrears commencing on December 1, 2016 and quarterly thereafter, beginning on January 1, 2017 and, so long as the certain conditions have been satisfied, may be paid in shares of common stock at the Company’s option. The Company may also elect to pay interest in whole or in part in cash. Interest on the Notes is computed on the basis of a 360-day year. The remaining terms are similar to that of the Notes as described above.
In addition to issuing the Placement Agent Note, the Company issued a 5-year warrant as partial payment for its placement agent services. The Placement Agent Warrant allows the purchase of 9,908 shares (of the Company’s common stock at an exercise price of $9.36 per share. If, after the first anniversary of the Closing Date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares by the placement agent, then the Placement Agent Warrant may also be exercised, in whole or in part, by means of a “cashless exercise”.
The warrant contained a fundamental transaction provision. Upon each such adjustment, the number of the shares of the Company’s common stock issuable upon exercise of the Warrant will increase proportionately. The Company accounted for such provision as a derivative liability and recognized the fair value at issuance. At each balance sheet date, the feature is re-valued and the corresponding change in fair value is recorded in other income and expense.
Zone Note
On the closing date, the Company used $750,000 of the proceeds from the sale of the Zone Notes to provide, through its newly formed wholly-owned subsidiary, HMNY Zone Loan LLC, a senior secured loan to Zone Technologies, Inc., secured by all of Zone’s assets. The remainder of the proceeds was used for general corporate purposes. The Zone Note is due on the earlier of September 7, 2017 or upon the date the Notes become due. The Zone Notes bear interest at a rate of 6%.
On October 25, 2016, the Company, entered into an Amendment to Promissory Note and Security and Pledge Agreement whereby the Company increased its senior secured loan to Zone by $383,305, thereby increasing the principal amount of the Promissory Note, dated September 7, 2016, made by Zone to a total of $1,133,305. The Amended Note is secured by a first priority lien on all of Zone’s assets pursuant to the Security and Pledge Agreement, dated as of September 7, 2016, between Zone and HMNY Zone Loan LLC.
December 2, 2016 Securities Purchase Agreement
Terms:
On December 2, 2016 (the “Closing Date”), the Company issued two Senior Secured Convertible Notes (the “December 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 Investor Note”) in the principal amount of $4,900,000 (the “Purchase Price Balance”). The Note in the aggregate original principal amount of $1,820,000 is referred to as the “Initial Note”. The Note in the aggregate original principal amount of $4,900,000 is referred to as the “Additional Note”. The December Notes included an original issue discount of $720,000.
The Notes
The aggregate principal amount of the December Notes is $6,720,000. Unless earlier converted or redeemed, the December Notes mature 8 months from the date they were issued. The December Notes bear interest at a rate of 6% per annum, subject to an increase to 12% during the first 30 days following the occurrence and continuance of an Event of Default and to 18% thereafter. Interest on the December Notes will be payable in arrears commencing on January 1, 2017 and quarterly thereafter, beginning on April 1, 2017 and, so long as certain conditions, as defined in the December Notes, have been satisfied, may be paid in shares of common stock at the Company’s option. The Company may also elect to pay interest in whole or in part in cash. Interest on the December Notes is computed on the basis of a 360-day year and twelve 30-day months.
The Investor may, at any time, elect to convert the December Notes into shares of the Company’s common stock at a conversion price, subject to certain beneficial ownership limitations. The Conversion Price is $4.45. The Company may, with the consent of the Investor, reduce the then-current Conversion Price to any amount equal to or greater than the Floor Price ($4.00) for any period of time deemed appropriate by the Company’s Board of Directors.
The Investor also has the right to convert the December Notes into shares of the Company’s common stock at the Alternate Conversion Price, subject to certain beneficial ownership limitations described below. The Alternate Conversion Price is defined as the lowest of (i) the Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, (ii) $4.00 for the Initial Note (subject to proportionate adjustment for stock splits, dividends and combinations), and (iii) the greater of (I) the Floor Price ($4.00) 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 five consecutive Trading Days ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable conversion notice, divided by (y) 5, for the Additional Note.
The Company accounted for the alternative conversion provisions as a derivative liability and recognized the fair value at issuance. At each balance sheet date, the feature is re-valued and the corresponding change in fair value is recorded in other income and expense.
Under certain conditions, the Company has the right to redeem all, but not less than all, of the amounts remaining unpaid under the December Notes. The portion of the December Notes subject to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. In the event of a change of control, the Investor may require the Company to redeem the Notes in cash.
The December Notes contain standard and customary events of default including but not limited to: (i) failure to register the Company’s common stock within certain time periods or failure to keep the registration statement effective as required by the Registration Rights Agreement; (ii) failure to maintain the listing of the Company’s common stock; (iii) failure to make payments when due under the Note; (iv) breaches of covenants and (iv) bankruptcy or insolvency.
Following an Event of Default, the Investor may require the Company to redeem all or any portion of the December Notes. The redemption amount may be paid in cash or with shares of the Company’s common stock, at the election of the Investor.
The Event of Default Redemption Price will be computed as a price equal to the greater of (i) 125% of the principal, interest and late charges to be redeemed and (ii) the product of (X) the principal, interest and late charges to be redeemed divided by the Conversion Price multiplied by (Y) the product of (1) 125% multiplied by (2) the greatest Closing Sale Price of the Company’s common stock on any Trading Day during the period commencing on the date preceding such Event of Default and ending on the date the Company makes the entire payment required to be made under the December Note.
In addition, following an Event of Default, the holders of the December Notes will have the right to convert the December Notes at the “Alternate Conversion Event of Default Price” which means, with respect to any Alternate Conversion, that price which shall be the lowest of (i) the applicable Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) 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 Conversion Notice.
The December Notes prohibit the Company from entering into specified transactions involving a change of control unless the successor entity, which must be a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market, assumes in writing all of the Company’s obligations under the Note.
The Company and its wholly-owned subsidiaries Zone Technologies, Inc. (“Zone”) and HMNY Zone Loan LLC each entered into a Security and Pledge Agreement in favor of the Investor as Collateral Agent. Pursuant to such Security and Pledge Agreements, the December Notes are secured by a perfected first priority security interest in all of the assets of the Company, Zone and HMNY Zone Loan LLC, subject to Permitted Liens.
Zone and HMNY Zone Loan LLC also provided a Guaranty to the Investor as Collateral Agent whereby they guarantee the punctual payment of all obligations that accrue after the commencement of any insolvency proceeding of the Company, whether or not the payment of such obligations are enforceable or allowable in the insolvency proceeding, and all fees, interest, premiums, penalties, causes of actions, costs, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Note Financing documents, and agree to pay any and all costs and expenses (including counsel fees and expenses) incurred by the Collateral Agent in enforcing any rights under the Guaranty or any other Note financing document.
Under the terms of a Registration Rights Agreement with the Investor, the Company is required to register for resale the shares of common stock that are issuable upon conversion of the Notes, additional shares that could be used as payment of monthly interest plus an additional number of shares so that the total number of shares of common stock registered equals 125% of the sum of the maximum number of shares issuable upon conversion of the Notes. The Registration Rights Agreement requires the Company to file the registration statement within 30 days after the Closing Date and to have the registration statement declared effective 90 days after the Closing Date (or 120 days after the Closing Date if the registration statement is subject to review by the Securities and Exchange Commission).
The Registration Rights Agreement provides for the payment of liquidated damages of one and one-half percent (1.5%) of the product of (x) the number of shares of common stock required by the Registration Rights Agreement to be included in the registration statement and (y) the Closing Sale Price as of the Trading Day immediately prior to the date a Registration Delay Payment, defined as the failure to file the registration statement in the time required, the failure to have the registration statement declared effective in the time required, the failure to maintain the effectiveness of the registration statement or the failure to keep current public information in the marketplace.
The Company is required to keep the registration statement effective (and the prospectus contained therein available for use) pursuant to Rule 415 for resales on a delayed or continuous basis at then-prevailing market prices at all times until the earlier of (i) the date as of which the holders of the Notes may sell all of the common stock issuable pursuant thereto without restriction pursuant to Rule 144 or (ii) the date on which all of the common stock covered by the registration statement shall have been sold.
December Investor Note
The December Investor Note is payable in full on August 2, 2017. The Investor’s obligation to pay the Company the Purchase Price Balance pursuant to the Investor Note is secured by $4.9 million, in the aggregate, in cash or cash equivalents. The Investor may, at its option at any time after December 31, 2016, voluntarily prepay the Investor Note, in whole or in part. The Investor Note is also subject to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the following mandatory prepayment events:
(1) Mandatory Prepayment upon Conversion of Initial Note – At any time the Investor has converted $1,820,000 or more in principal amount of the Initial Note, the Investor will be required to prepay the Investor Note, on a dollar-for-dollar basis, for each subsequent conversion of the Additional Note.
(2) Mandatory Prepayment upon Mandatory Prepayment Notices – The Company may require the Investor to prepay the Investor Note by delivering a mandatory prepayment notice to the Investor, subject to (i) the satisfaction of certain equity conditions, and (ii) the Investor’s receipt of a valid written notice by the Company electing to effect a mandatory conversion of Restricted Principal (defined as $4.9 million of the principal amount of the Notes), not in excess of the Maximum Mandatory Share Amount or the Maximum Mandatory Conversion Amount.
Placement Agent Warrant
On the Closing Date, the Company issued a 5-year warrant (the “Placement Agent Warrant”) to Palladium as partial payment for its placement agent services. The Placement Agent Warrant allows Palladium to purchase 22,000 shares (the “Warrant Shares”) of the Company’s common stock at an exercise price per share equal to the greater of $4.45 and the closing bid price of the Company’s common stock on the Nasdaq Capital Market on the Closing Date. If, after the first anniversary of the Closing Date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares by Palladium, then the Placement Agent Warrant may also be exercised, in whole or in part, by means of a “cashless exercise”.
The Placement Agent Warrant contains a fundamental transaction provision. Upon each such adjustment, the number of the shares of the Company’s common stock issuable upon exercise of the Placement Agent Warrant will increase proportionately. The Company accounted for such provision as a derivative liability and recognized the fair value at issuance. At each balance sheet date, the feature is re-valued and the corresponding change in fair value is recorded in other income and expense.
Note Activity:
Following is an analysis of the activity in the Senior Secured Convertible Notes during the year ended December 31, 2016:
|
|
Amount
|
|
Balance at December 31, 2015
|
|
$
|
-
|
|
Issuance of Notes during the period
|
|
|
4,301,075
|
|
Issuance of Placement Agent Note
|
|
|
80,000
|
|
Issuance of December Notes during the period
|
|
|
6,720,000
|
|
Right of setoff of the Investor Notes
|
|
|
(3,000,000
|
)
|
Right of setoff of the December Investor Notes
|
|
|
(4,900,000
|
)
|
Receipt of proceeds from Investor Notes
|
|
|
3,000,000
|
|
Conversion of Notes
|
|
|
(3,969,075
|
)
|
Debt discount
|
|
|
(5,180,000
|
)
|
Original issue discount
|
|
|
(1,021,075
|
)
|
Accretion of debt discount
|
|
|
4,000,500
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
31,425
|
|
Under ASC 210-20-45-1, management offset the Notes by the Investor Notes yet to be funded.
The funded and unfunded portion of the Investor Note consists of the following at December 31, 2016:
|
|
December 31,
2016
|
|
December Investor notes - Available funding (subject to limitations)
|
|
$
|
4,900,000
|
|
Unfunded amount of investor notes
|
|
|
(4,900,000
|
)
|
|
|
|
|
|
Investor notes - funded (prior to any repayments)
|
|
$
|
-
|
|
During the period January 1, 2017 through March 31, 2017, the Company has received an additional $3,000,000 in proceeds from the Investor Note.
During the year ended December 31, 2016, the Investor has converted a total of $3,969,075 in principal and $46,283 in interest into 804,401 shares of the Company’s common stock.
From January 1, 2017 through April 10, 2017, the Investor has converted an additional $1,857,000 in principal and $1,217 in interest into 466,352 shares.
9)
|
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES MEASURED ON A RECURRING BASIS
|
Level 3 Financial Liabilities - Derivative conversion features and warrant liabilities
Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as of December 31, 2016:
|
|
Carrying
|
|
|
Fair Value Measurement Using
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
230,663
|
|
|
$
|
230,663
|
|
Derivative liability – conversion feature
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
977,129
|
|
|
$
|
977,129
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,207,792
|
|
|
$
|
1,207,792
|
|
There were no financial assets and liabilities measured at fair value on a recurring basis on the consolidated balance sheet as of December 31, 2015.
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the year ended December 31, 2016:
|
|
Fair Value
Measurement
Using Level 3
Inputs
|
|
|
|
Total
|
|
Balance, January 1, 2016
|
|
$
|
-
|
|
Purchases, issuances and settlements
|
|
|
6,391,364
|
|
Conversions to paid in capital
|
|
|
(3,999,457
|
)
|
Change in fair value of derivative liabilities
|
|
|
(1,184,115
|
)
|
Balance, December 31, 2016
|
|
$
|
1,207,792
|
|
The fair value of the derivative conversion features and warrant liabilities as of December 31, 2016 were calculated using a Monte-Carlo option model valued with the following weighted average assumptions:
Dividend Yield
|
|
|
|
0%
|
|
|
Expected Volatility
|
|
|
154%
|
-
|
230%
|
|
Risk free interest rate
|
|
|
0.82%
|
–
|
1.12%
|
|
Contractual term (in years)
|
|
|
0.67
|
–
|
5.0
|
|
Exercise price
|
|
|
$4.00
|
-
|
$9.36
|
|
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 would result in a higher (lower) fair value measurement.
10)
|
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 shareholders approved at the annual shareholders meeting held on May 5, 2014. There were no shares outstanding under the 1997 Stock Option and Award Plan. The 2014 Plan sets aside and reserves 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 Compensation Committee of the Company’s Board of Directors 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. Effective November 7, 2016 the plan was amended to include a total of 1,125,000 shares of common stock to be issued under the Employee Stock Option Plan. Through the date of filing of this Form 10-K no awards have been granted under the 2014 Plan.
11)
|
CONCENTRATION OF CREDIT RISK
|
The Company’s policy is to place its cash with high credit quality financial instruments and institutions and limit the amounts invested with any one financial institution or in any type of instrument. Deposits held with banks may exceed the amount of insurance provided on such deposits. The Company has not experienced any losses on its deposits of cash.
The revenues of the Company’s top four customers represented approximately 91.3% of the revenues for the year ended December 31, 2016. The revenues of the Company’s top four customers represented approximately 90.2% of the revenues for the year ended December 31, 2015. No other customer represented greater than 10% of the Company’s revenues for such periods. The Company continues its effort to broaden its customer base in order to mitigate this risk.
One of the Company’s clients, while continuing the engagement under a Master Services Agreement, issued a notice to terminate, as of May 15, 2016, the arrangement for use of the Offshore Development Center (ODC) provided to the client by the Company. However the ODC, together with all of the employees, is now being utilized by another company (although not one of the Company’s clients), thus ensuring that no additional expenses are incurred by the Company with respect to the ODC. For the years ended December 31, 2016 and 2015, revenue generated from use of the ODC was approximately $1.10 million and $2.50 million, respectively. There can be no assurance that the Company will be able find other clients to make up for the annual revenue shortfall that resulted from the termination of this relationship.
12)
|
COMMITMENTS AND CONTINGENCIES
|
The Company’s commitments at December 31, 2016 are comprised of the following:
Contractual Obligations
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less
Than 1
Year
|
|
|
1 - 3
Years
|
|
|
3 - 5
Years
|
|
|
More
Than 5
Years
|
|
Operating Lease Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
(1)
|
|
|
1,118,810
|
|
|
|
208,945
|
|
|
|
445,885
|
|
|
|
463,980
|
|
|
|
-
|
|
Total
|
|
$
|
1,118,810
|
|
|
$
|
208,945
|
|
|
$
|
445,885
|
|
|
$
|
463,980
|
|
|
$
|
-
|
|
(1) The lease for the Company’s facility in New York included an expiration date of April 30, 2017, however, the lease was amended on March 28, 2017 to extend the term to June 30, 2022. The Company also leases an office in Bangalore, India. Unless the lease term is extended, the lease will expire on October 7, 2017.
As of December 31, 2016, the Company does not have any “Off Balance Sheet Arrangements”.
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. (“Zone”), 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 seeks compensation from the Company and the Zone Defendants in an amount of no less than $3 million plus prejudgment interest, attorney’s fees and costs and expenses. 3839 Holdings is also seeking an injunction to prevent the Company and the Zone Defendants from transferring or disposing of assets. The Company and Zone believe that the claims are baseless and intend to vigorously defend the action.
13)
|
TRANSACTIONS WITH RELATED PARTIES
|
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 on 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, management and operating the ODCs for the Company. The Company furnished HMIT with a security deposit of $2 million 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. The amount payable to HMIT for services rendered under the MOU was $0 and $0 for the twelve months ended December 31, 2015 and 2016, respectively. All payments to HMIT under the MOU were to be made after collections were received from clients. No amount was paid to HMIT for services rendered under the MOU for the twelve months ended December 31, 2015 and 2016, respectively. 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 twelve months ended December 31, 2015 and 2016 the Company’s revenue from services provided with offshore support of HMIT was approximately $2.3 million and $1.1 million, respectively. The amount paid to HMIT for services rendered, including prepayment of certain expenses, under the PSA for the twelve months ended December 31, 2015 and 2016 was approximately $224,000 and $0, respectively.
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 $2.3 million (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 Reserve Amount.
Jayamaruthi Software Systems Pvt. Ltd. (Subsidiary of HMIT)
The Company obtained certain services from the HMIT subsidiary, Jayamaruthi Software Systems Pvt. Ltd., under the PSA. The amount payable for the services rendered during the 2015 year was approximately $20,000. The amount paid during the 2015 year was approximately $16,000. The amount payable at the end of the 2015 year was approximately $4,000. We had no transactions with Jayamaruthi during 2016.
Maruthi Consulting Inc. (Subsidiary of HMIT)
The Company provided consulting services to Maruthi Consulting Inc., a subsidiary of HMIT. As of January 1, 2015, we had a receivable due from Maruthi in the amount of $75,338 and during 2015 we billed an additional $223,454 to Maruthi for services rendered. We provided no services to Maruthi during the year ended December 31, 2016. During 2015, we received $237,318 in payments from Maruthi. Therefore, the amounts receivable on December 31, 2016 and 2015 were approximately $61,474 and $61,474, respectively.
The Company also procured services from Maruthi during 2015. The amount payable for the services procured during 2015 was $23,000. We paid $21,000 to Maruthi during 2015 and $2,000 during 2016.
Helios and Matheson IT (Bangalore) Ltd. (Subsidiary of HMIT)
During the year ended December 31, 2016, the Company’s Indian subsidiary obtained professional services from Helios and Matheson IT (Bangalore) Ltd. which is a subsidiary of HMIT. An amount of $236,274 has been included in the Company’s operating expenses during the year ended December 31, 2016.
Services rendered by IonIdea, Inc.
Effective August 1, 2013, the Company renewed a Statement of Work dated August 1, 2012 with IonIdea, Inc. to provide certain professional services, workstation facilities and communication equipment to the Company and its wholly-owned subsidiary, Helios and Matheson Global Services Private Limited. The Statement of Work commenced on August 1, 2008, and continued through July 31, 2014 and was thereafter renewed automatically for one year unless terminated by either party in accordance with the provisions of the original agreement. The Statement of Work was terminated on September 30, 2015. Kishan Grama Ananthram, a former member of the Company’s Board, is the Chief Executive Officer of IonIdea and Mr. Ananthram owns all of the outstanding capital stock of IonIdea. The amounts paid to IonIdea by the Company for services provided during the twelve months ended December 31, 2016 and 2015 were approximately $0 and $41,000, respectively.
Consulting Services from Viraj Patel
Viraj Patel was a director until his resignation on April 1, 2016. Following his resignation, Mr. Patel assisted three new members of our Board in assuming their roles as directors. We paid Mr. Patel a consulting fee of $12,500 for providing these services.
During the year ended December 31, 2016, the Company issued warrants to purchase 70,714 shares of the Company’s common stock to the Palladium Capital Advisors LLC. The warrants are exercisable for five years at an exercise price range between $4.45 to $9.36 per share.
The following is a summary of the Company’s stock warrant activity during the year ended December 31, 2016:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding - January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
70,714
|
|
|
|
6.26
|
|
|
|
5
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding – December 31, 2016
|
|
|
70,714
|
|
|
$
|
6.26
|
|
|
|
4.87
|
|
Exercisable – December 31, 2016
|
|
|
70,714
|
|
|
$
|
6.26
|
|
|
|
4.87
|
|
At December 31, 2016, the total intrinsic value of warrants outstanding and exercisable was $0.
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,
|
|
|
|
2016
|
|
|
2015
|
|
Licensing revenues
|
|
$
|
(7,000
|
)
|
|
$
|
(5,000
|
)
|
Accounts receivable reserve
|
|
|
194,000
|
|
|
|
40,000
|
|
Depreciation and amortization
|
|
|
353,000
|
|
|
|
262,000
|
|
Investments
|
|
|
928,000
|
|
|
|
928,000
|
|
Other
|
|
|
1,141,000
|
|
|
|
1,135,000
|
|
Net operating losses
|
|
|
9,427,000
|
|
|
|
5,162,000
|
|
Subtotal
|
|
|
12,036,000
|
|
|
|
7,522,000
|
|
Valuation allowance
|
|
|
(12,036,000
|
)
|
|
|
(7,522,000
|
)
|
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, 2006, HMIT acquired a greater than 50 percent ownership of the Company. Accordingly, the actual utilization of the net operating loss carry-forwards for tax purposes are limited annually under Code Section 382 to a percentage (currently about four and a half percent) of the fair market value of the Company at the date of this ownership change.
At December 31, 2016, the Company has federal net operating loss carry-forwards of approximately $14.8 million, which will begin to expire in 2020. The New Jersey net operating loss carry-forwards of approximately $1.9 million 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 of an equal amount has been established. During the years ended December 31, 2016 and 2015, the valuation allowance increased by approximately $4,514,000 and $959,000, respectively.
Significant components of the provision for income taxes are as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State and local
|
|
|
12,000
|
|
|
|
3,674
|
|
Foreign
|
|
|
(26,665
|
)
|
|
|
67,571
|
|
Total Current
|
|
$
|
(14,665
|
)
|
|
$
|
71,245
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
-
|
|
|
|
-
|
|
State and local
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total Deferred
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
(14,665
|
)
|
|
$
|
71,245
|
|
A reconciliation between the federal statutory rate and the effective income tax rate for the years ended December 31, 2016 and 2015 is as follows:
|
|
2016
|
|
|
2015
|
|
Federal statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State and local taxes net of federal tax benefit
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
Non-deductible expenses
|
|
|
18.9
|
|
|
|
(0.1
|
)
|
Foreign tax expense
|
|
|
(0.7
|
)
|
|
|
0.7
|
|
Change in valuation allowance
|
|
|
(51.9
|
)
|
|
|
(38.0
|
)
|
Total
|
|
|
0.20
|
%
|
|
|
(3.5
|
)
%
|
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 two segments, Consulting and Technology. During the year ended December 31, 2015, the Company only operated in the consulting segment.
The Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes our segment information for the year ended December 31, 2016:
|
|
Consulting
|
|
|
Technology
|
|
|
Total
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,759,700
|
|
|
$
|
–
|
|
|
$
|
6,759,700
|
|
Cost of revenue
|
|
|
(4,860,927
|
)
|
|
|
–
|
|
|
|
(4,860,927
|
)
|
Gross margin
|
|
|
1,898,773
|
|
|
|
–
|
|
|
|
1,898,773
|
|
Loss from operations
|
|
$
|
(1,538,510
|
)
|
|
$
|
(557,825
|
)
|
|
$
|
(2,096,335
|
)
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
|
$
|
1,651,508
|
|
|
$
|
2,747,240
|
|
Accounts receivable
|
|
|
410,106
|
|
|
|
-
|
|
|
|
410,106
|
|
Property and equipment
|
|
|
34,368
|
|
|
|
10,844
|
|
|
|
45,212
|
|
Intangible assets
|
|
|
–
|
|
|
|
6,004,691
|
|
|
|
6,004,691
|
|
Goodwill
|
|
|
–
|
|
|
|
4,599,969
|
|
|
|
4,599,969
|
|
Accounts payable and accrued expenses
|
|
$
|
1,196,668
|
|
|
$
|
134,450
|
|
|
$
|
1,331,118
|
|
February 8, 2017 Securities Purchase Agreement
Terms:
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 in the principal amount of $5,000,000.
The February 2017 Notes
The aggregate principal amount of the February 2017 Notes is $5,681,818, of which the note for $681,818 is referred to as the "Initial Note" and the note for $5,000,000 is referred to as the "Additional Note". Unless earlier converted or redeemed, the February 2017 Notes mature 8 months from the date they were issued. The February 2017 Notes bear interest at a rate of 6% per annum, subject to an increase to 12% during the first 30 days following the occurrence and continuance of an Event of Default and to 18% thereafter.
The Investor may, at any time, elect to convert the February 2017 Notes into shares of the Company’s common stock at the Conversion Price, subject to certain beneficial ownership limitations. The Conversion Price is $4.00.
The Investor also has the right to convert the February 2017 Notes into shares of the Company’s common stock at the Alternate Conversion Price, subject to certain beneficial ownership limitations. The Alternate Conversion Price is defined as the lowest of (i) the Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, (ii) $4.00 for the Initial Note (subject to proportionate adjustment for stock splits, dividends and combinations), and (iii) the greater of (I) the Floor Price ($4.00) 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 five consecutive Trading Days ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable conversion notice, divided by (y) 5, for the Additional Note.
The Company accounted for the alternative conversion provisions as a derivative liability and recognized the fair value at issuance. At each balance sheet date, the feature is re-valued and the corresponding change in fair value is recorded in other income and expense.
Under certain conditions, the Company has the right to redeem all, but not less than all, of the amounts remaining unpaid under the February 2017 Notes. The portion of the February 2017 Notes subject to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. In the event of a change of control, the Investor may require the Company to redeem the Notes in cash.
The February 2017 Notes contain standard and customary Events of Default including but not limited to: (i) failure to register the Company’s common stock within certain time periods or failure to keep the registration statement effective as required by the Registration Rights Agreement; (ii) failure to maintain the listing of the Company’s common stock; (iii) failure to make payments when due under the Notes; (iv) breaches of covenants and (iv) bankruptcy or insolvency.
Following an Event of Default, the Investor may require the Company to redeem all or any portion of the February 2017 Notes. The redemption amount may be paid in cash or with shares of the Company’s common stock, at the election of the Investor.
The Event of Default Redemption Price will be computed as a price equal to the greater of (i) 125% of the principal, interest and late charges to be redeemed and (ii) the product of (X) the principal, interest and late charges to be redeemed divided by the Conversion Price multiplied by (Y) the product of (1) 125% multiplied by (2) the greatest Closing Sale Price of the Company’s common stock on any Trading Day during the period commencing on the date preceding such Event of Default and ending on the date the Company makes the entire payment required to be made under the February 2017 Note.
In addition, following an Event of Default, the holders of the February 2017 Notes will have the right to convert the February 2017 Notes at the “Alternate Conversion Event of Default Price” which means, with respect to any Alternate Conversion, that price which shall be the lowest of (i) the applicable Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) 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 Conversion Notice.
The February 2017 Notes prohibit the Company from entering into specified transactions involving a change of control unless the successor entity, which must be a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market, assumes in writing all of the Company’s obligations under the Note.
The Company and its wholly-owned subsidiaries, Zone Technologies, Inc. (“Zone”) and HMNY Zone Loan LLC, each entered into a Security and Pledge Agreement in favor of the Investor as Collateral Agent. Pursuant to such Security and Pledge Agreements, the February 2017 Notes are secured by a perfected first priority security interest in all of the assets of the Company, Zone and HMNY Zone Loan LLC, subject to Permitted Liens.
Zone and HMNY Zone Loan LLC also provided a Guaranty to the Investor as Collateral Agent whereby they guarantee the punctual payment of all obligations that accrue after the commencement of any insolvency proceeding of the Company, whether or not the payment of such obligations are enforceable or allowable in the insolvency proceeding, and all fees, interest, premiums, penalties, causes of actions, costs, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Note Financing documents, and agree to pay any and all costs and expenses (including counsel fees and expenses) incurred by the Collateral Agent in enforcing any rights under the Guaranty or any other Note financing document.
Under the terms of a Registration Rights Agreement with the Investor, the Company is required to register for resale the shares of common stock that are issuable upon conversion of the February 2017 Notes, additional shares that could be used as payment of monthly interest plus an additional number of shares so that the total number of shares of common stock registered equals 125% of the sum of the maximum number of shares issuable upon conversion of the February 2017 Notes. The Registration Rights Agreement requires the Company to file the registration statement within 30 days after the Closing Date and to have the registration statement declared effective 90 days after the Closing Date (or 120 days after the Closing Date if the registration statement is subject to review by the Securities and Exchange Commission).
The Registration Rights Agreement provides for the payment of liquidated damages of one and one-half percent (1.5%) of the product of (x) the number of shares of common stock required by the Registration Rights Agreement to be included in the registration statement and (y) the Closing Sale Price as of the Trading Day immediately prior to the date a Registration Delay Payment, defined as the failure to file the registration statement in the time required, the failure to have the registration statement declared effective in the time required, the failure to maintain the effectiveness of the registration statement or the failure to keep current public information in the marketplace.
The Company is required to keep the registration statement effective (and the prospectus contained therein available for use) pursuant to Rule 415 for resales on a delayed or continuous basis at then-prevailing market prices at all times until the earlier of (i) the date as of which the holders of the Notes may sell all of the common stock issuable pursuant thereto without restriction pursuant to Rule 144 or (ii) the date on which all of the common stock covered by the registration statement shall have been sold.
February 2017 Investor Note
The February 2017 Investor Note is payable in full on October 8, 2017. The Investor’s obligation to pay the Company the Purchase Price Balance pursuant to the Investor Note is secured by $5.0 million, in the aggregate, in cash or cash equivalents. The Investor may, at its option at any time after February 28, 2017, voluntarily prepay the Investor Note, in whole or in part. The Investor Note is also subject to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the following mandatory prepayment events:
(1) Mandatory Prepayment upon Conversion of Initial Note – At any time the Investor has converted $681,818 or more in principal amount of the Initial Note, the Investor will be required to prepay the Investor Note, on a dollar-for-dollar basis, for each subsequent conversion of the Additional Note.
(2) Mandatory Prepayment upon Mandatory Prepayment Notices – The Company may require the Investor to prepay the Investor Note by delivering a mandatory prepayment notice to the Investor, subject to (i) the satisfaction of certain equity conditions, and (ii) the Investor’s receipt of a valid written notice by the Company electing to effect a mandatory conversion of Restricted Principal (defined as $5.0 million of the principal amount of the Notes), not in excess of the Maximum Mandatory Share Amount or the Maximum Mandatory Conversion Amount.
Placement Agent Warrants
As partial payment for its placement agent services, Palladium Capital Advisors LLC (“Palladium”) will receive, as and when prepayments are made under the Investor Note, 5-year warrants (the “Placement Agent Warrants”) for the purchase of 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the Additional Note becomes convertible, without regard to any increase in shares issuable under a “True Up” or ratchet provision (the “Warrant Shares”). The exercise price of the Placement Agent Warrants will be $4.50 and the Placement Agent Warrants cannot be exercised for a period of 6 months from the applicable date of issuance. If, after the first anniversary of the applicable issuance date of the Placement Agent Warrants, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares by Palladium, then the Placement Agent Warrants may also be exercised, in whole or in part, by means of a “cashless exercise”.
The Placement Agent Warrants contain a fundamental transaction provision. Upon each such adjustment, the number of the shares of the Company’s common stock issuable upon exercise of the Placement Agent Warrants will increase proportionately. The Company accounted for such provision as a derivative liability and recognized the fair value at issuance. At each balance sheet date, the feature is re-valued and the corresponding change in fair value is recorded in other income and expense.
Common Share Issuances
On January 20, 2017, the Board of Directors authorized the issuance of 200,000 shares of the Company’s common stock to two third party service providers, for an aggregate issuance of 400,000 shares of the Company’s common stock.
The Board of Directors authorized the issuance of 5,000 shares of the Company’s common stock to each independent director on the last business day of each calendar quarter. Such issuances will begin on March 31, 2017.
Consulting Agreement – Sol Financial Inc.
On January 20, 2017, the Board of Directors authorized management to enter into a consulting agreement with a third party provider for business development, technology development, and merger and acquisition services. For such services, the Company entered into a month to month contract for $10,000 per month and an issuance of 120,000 shares of the Company’s common stock