Notes
to Condensed Consolidated Financial Statements
The accompanying unaudited
condensed interim consolidated financial statements (“interim statements”) of Helios and Matheson Analytics Inc. (“Helios
and Matheson” or the “Company”) have been prepared in accordance with accounting principles generally accepted
in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article
8 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the
information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments
and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these
interim statements are not necessarily indicative of the results that may be reported for the entire year. The consolidated balance
sheet as of December 31, 2017 was derived from the audited consolidated financial statements as of and for the year ended December
31, 2017. These interim statements should be read in conjunction with the Company’s consolidated financial statements for
the year ended December 31, 2017.
2.
|
Business and Basis of Presentation
|
Business
Since 1983, the Company
has provided high quality information technology, or IT, services and solutions including a range of technology platforms focusing
on big data, business intelligence, and consumer-centric technology. More recently, to provide greater value to stockholders, the
Company has sought to expand its business primarily through acquisitions that leverage its capabilities and expertise.
On November 9, 2016,
the Company acquired Zone Technologies, Inc., a Nevada corporation (“Zone”), a state-of-the-art mapping and spatial
analysis company. On December 11, 2017 the Company acquired a majority interest in MoviePass Inc., a Delaware corporation (“MoviePass”),
whose primary product offering is MoviePass™, the nation’s premier movie theater subscription service. MoviePass provides
subscribers with access to up to one new movie title in theaters per day, subject to the MoviePass terms of use, at a fixed monthly,
quarterly, semi-annual or annual fee.
In January 2018, the Company
formed the Company’s wholly-owned subsidiary, MoviePass Ventures LLC, a Delaware limited liability (“MoviePass Ventures”),
which aims to collaborate with film distributors to share in film revenues while using the data analytics that MoviePass offers
for marketing and targeting services reaching MoviePass’ paying subscribers using the platform.
Basis of Presentation
The Company’s
condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The condensed consolidated financial
statements include all accounts of the Company and its wholly owned and majority owned subsidiaries. The Company consolidates entities
in which it owns more than 50% of the voting common stock and controls operations. All intercompany transactions and balances among
consolidated subsidiaries have been eliminated. The Company consolidated the operations of MoviePass as of December 11, 2017.
Use of Estimates
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include,
but are not limited to, allowance for doubtful accounts, purchase accounting allocations, recoverability and useful lives of property,
plant and equipment, identifiable intangibles and goodwill, warrant liability, derivative liabilities, the valuation allowance
of deferred taxes, contingencies and equity compensation. Actual results could differ from those estimates.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
3.
|
Summary of Significant Accounting Policies
|
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.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
As of March 31, 2018,
the Company owned approximately 81.2% of MoviePass.
Subscription revenue
consists primarily of subscription fees for monthly, quarterly, semi-annual or annual subscriptions. Revenue from subscriptions
is recognized on a straight-line basis when the performance obligations to provide each service for the period are satisfied, which
is over time as our subscription services can be used by our subscribers at any time. Consumers purchasing subscriptions generally
pay on an annual or monthly basis, and any prepaid amounts for subscription services are recorded as deferred revenue and amortized
to revenue evenly over the service period which begins once a subscriber has activated his or her subscription.
The Company also generates
revenue from marketing services primarily related to major motion picture releases. Marketing revenue is generated through e mail
and digital advertising to the Company’s subscriber base and pursuant to a contract for such services with the movie distributor.
Such agreements are short term and are generally represented by a fully executed customer agreement. Revenue is recognized as performance
obligations are satisfied which generally occurs within a month of the date the contract begins. Payment terms on marketing agreements
vary and payment is generally due once the performance obligations have been satisfied.
Adoption of ASC 606 Revenue from
Contracts with Customers
The Company adopted
the new revenue standard, ASC 606, using the modified retrospective method with respect to all non-completed contracts as of January
1, 2018. This method required retrospective application of the new accounting standard to all unfulfilled contracts that were outstanding
as of January 1, 2018. Revenues and contract assets and liabilities for contracts completed prior to January 1, 2018 are presented
in accordance with ASC 606.
The Company has determined
that there were no adjustments required with respect to the adoption of ASC 606 with respect to any prior periods.
Disaggregation of Revenue
|
|
Three Months Ended
March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Types of revenues:
|
|
|
|
|
|
|
Consulting
|
|
$
|
839,503
|
|
|
$
|
1,358,062
|
|
Subscription
|
|
|
47,162,447
|
|
|
|
-
|
|
Marketing and promotional services
|
|
|
1,440,910
|
|
|
|
-
|
|
Total revenues
|
|
$
|
49,442,860
|
|
|
$
|
1,358,062
|
|
The following is a
description of the principal activities from which the Company generates revenue, including from subscribers and consulting customers.
Consulting Revenue
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.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
Subscription Revenue
Subscription revenue
consist of subscription fees related to monthly, quarterly, semi-annual and annual subscriptions to the MoviePass service. Once
a subscriber activates his or her account, revenue is recognized on a straight-line basis when the performance obligation to provide
each service for the period is satisfied, which is over time as our subscription service is continuously available to our subscribers.
Marketing and Promotional Services
Marketing and promotional
services consists of services associated with the MoviePass business. The Company recognizes revenue from marketing contracts with
customers when the performance obligations have been completed and the service has been provided to the customer.
Deferred Revenue
Subscription fees are
generally paid in advance by credit card through merchant processors. Subscription fees received in advance of completion of the
performance obligations are recorded as deferred revenue until such time the services are provided to the customer.
Goodwill
The Company reviews
goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of a triggering event. The Company
performs reviews of each of its operating divisions that have goodwill balances. Generally, fair value is determined using a multiple
of earnings, or discounted projected future cash flows, and is compared to the carrying value of a reporting unit for purposes
of identifying potential impairment. Projected future cash flows are based on management’s knowledge of the current operating
environment and expectations for the future. Goodwill impairment is recognized for any excess of the carrying value of the reporting
unit’s goodwill over the fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
The identification
of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant
judgments by management. These judgments include the consideration of the general economic outlook, industry and market considerations,
cost factors, overall financial performance, events which are specific to the Company, and trends in the market price of our common
stock. Each factor is assessed to determine whether it impacts the impairment test as well as the magnitude of any such impact.
For the three months ended March 31, 2018 and 2017, the Company did not record an impairment on goodwill.
Intangible Assets, net
Intangible
assets consist of customer relationships, technology, trademarks, broker relationships and patents. Applicable long-lived assets
are amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate
revenue, or the statutory or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue
generation are reviewed periodically for appropriateness and are based upon management’s judgment. Intangible assets are
amortized on the straight-line method over their useful lives ranging from 3 to 12 years.
The
Company recorded amortization expense of $1,255,859 and $426,651 for the three months ended March 31, 2018 and 2017,
respectively.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
The Company
monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events
have occurred. These events include current period losses or a projection of continuing losses or a significant decrease in the
market value of an asset. When a triggering event occurs, an impairment calculation is performed, comparing projected undiscounted
future cash flows, utilizing current cash flow information and expected growth rates, to the respective carrying value. If the
Company identifies impairment for long-lived assets to be held and used, the Company compares the assets’ current carrying
value to the assets’ fair value. Fair value is based on current market values or discounted future cash flows. The Company
records impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal,
the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar
assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market
value, reduced by estimated direct costs of disposal.
The Company did not record impairment charges
in regard to definite-lived intangible assets for the three months ended March 31, 2018 and 2017.
Research
and Development
Research
and development costs are charged to operations when incurred and are included in operating expenses.
Stock
Based Compensation
The Company follows
the fair value recognition provisions in ASC 718,
Stock Compensation
(“ASC 718”) and the provisions of ASC
505
Equity
(“ASC 505”) for stock-based transactions with non-employees. Stock based compensation expense recognized
during the three months ended March 31, 2018 includes compensation expense for all share-based payments based on a grant date
fair value estimated in accordance with the provisions in the guidance for stock compensation issued by the Financial Accounting
Standards Board (“FASB”). The grant date is the date at which an employer and employee reach a mutual understanding
of the key terms and conditions of a share-based payment award.
Fair
Value Measurements
ASC
Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which
requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs
that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in an active market for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not
active.
Level 3: Unobservable
inputs that are supported by little or no market activity; therefore the inputs are developed by the Company using estimates and
assumptions that the Company expects a market participant would use.
The
carrying value of the Company’s short-term investments, prepaid expenses and other current assets, accounts receivable,
accounts payable and accrued expenses approximate fair value because of the short-term maturity of these financial instruments.
The
derivative liability in connection with the conversion feature of the Company’s convertible debt and the warrant liability
is classified as a level 3 liability.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
Recent
Accounting Pronouncements
In May 2014, the FASB
issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
(“ASU 2014-09”),
which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize
revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an
entity expects to be entitled for those goods or services. ASU 2014-09 defines a five-step process to achieve this core principle
and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing
U.S. GAAP. In addition, this guidance requires new or expanded disclosures related to the judgments made by companies when following
this framework and additional quantitative disclosures regarding contract balances and remaining performance obligations. ASU
No. 2014-09 may be applied using either a full retrospective approach, under which all years included in the financial statements
will be presented under the revised guidance, or a modified retrospective approach, under which financial statements will be prepared
under the revised guidance for the year of adoption, but not for prior years. Under the latter method, entities will recognize
a cumulative catch-up adjustment to the opening balance of retained earnings at the effective date for contracts that still require
performance by the entity.
ASU
No. 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those
annual reporting periods. The Company developed an implementation plan to adopt this new guidance, which included an assessment
of the impact of the new guidance on the Company’s financial position and results of operations. On January 1, 2018, the
Company adopted the new accounting standard ASC 606,
Revenue from Contracts with Customers
and for all open contracts and
related amendments as of January 1, 2018 using the modified retrospective method. Results for reporting periods beginning after
January 1, 2018 will be presented under ASC 606, while the comparative information will not be restated and will continue to be
reported under the accounting standards in effect for those periods.
During
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments – Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities,
(“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to
the presentation of other comprehensive income. On January 1, 2018, the Company adopted the new accounting standard
and has substantially completed its assessment and has determined that this standard will have no impact on its financial position
or results of operations.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(“ASC 230”):
Classification of Certain
Cash Receipts and Cash Payments
, (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable. On January 1, 2018,
the Company adopted ASU 2016-15. The adoption of this update did not significantly impact the current presentation of the Company’s
consolidated financial statements.
In November 2016, the
FASB issued ASU 2016-18,
Statement of Cash Flows
(“ASC 230”):
Restricted Cash
(“ASU 2016-18”),
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. On January 1, 2018, the Company
adopted ASU 2016-18. The adoption of this update did not significantly impact the Company’s consolidated financial statements.
The following accounting
standards updates were recently issued and have not yet been adopted by us. These standards are currently under review to determine
their impact on our consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated
statements of cash flows.
In February 2016, the
FASB issued ASU 2016-02,
Leases,
(“ASC 842”), which supersedes FASB ASC 840, Leases and provides principles
for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires
lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or
not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized
based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record
a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification.
Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard
is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The
Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-02 on its results of operations, cash
flows and financial position.
In October 2016, the FASB
issued ASU 2016-16,
Income Taxes
(“ASC 740”):
Intra-Entity Transfers of Assets Other than Inventory
(“ASU 2016-16”), which eliminates the exception that prohibits the recognition of current and deferred income tax
effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated
guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years.
Early adoption of the update is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-16 on
its consolidated financial statements.
In January 2017,
the FASB issued ASU 2017-04
Intangibles-Goodwill and Other
(“ASC 350”):
Simplifying the Accounting for Goodwill
Impairment
(“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step
2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures
to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities)
following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business
combination. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04
is effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019 and an entity
should apply the amendments of ASU 2017-04 on a prospective basis. Early adoption is permitted for interim or annual goodwill
impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effects of ASU 2017-04
on its consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share
(“ASC 260”),
Distinguishing Liabilities from
Equity
(“ASC 480”), and Derivatives and Hedging (“ASC 815”). ASU No. 2017-11 is intended to simplify
the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed are: (i) determining
whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities from equity
for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily redeemable non-controlling
interests. ASU No. 2017-11 is effective for the Company on January 1, 2019. The Company is currently evaluating the potential
impact of ASU No. 2017-11 on the Company’s consolidated financial statements.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
4.
|
Going Concern Analysis
|
During the second quarter
of 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provides U.S. GAAP guidance on management’s
responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern
and about related footnote disclosures. Under this standard, the Company is required to evaluate whether there is substantial doubt
about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s
ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about
the Company’s ability to continue as a going concern within 12 months after the Company’s financial statements were
issued (May 15, 2018). Management considered the Company’s current financial condition and liquidity sources, including current
funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before May
15, 2019.
The Company is subject
to a number of risks similar to those of other big data technology, technology consulting companies and subscription based businesses,
including its dependence on key individuals, uncertainty of product development and generation of revenues and positive cash flow,
dependence on outside sources of capital, risks associated with research, development, testing, and successful protection of intellectual
property, the Company’s ability to maintain and grow its subscriber base and the Company’s susceptibility to infringement
on the proprietary rights of others. The attainment of profitable operations is dependent on future events, including obtaining
adequate financing to fulfill the Company’s growth and operating activities and generating a level of revenues adequate to
support the Company’s cost structure.
The Company has experienced
net losses and significant cash outflows from cash used in operating activities over the past years. As of and for the three months
ended March 31, 2018, the Company had an accumulated deficit of $184,319,310 a loss from operations of $107,731,993 and net cash
used in operating activities of $68,409,239.
The Company expects to
continue to incur net losses and have significant cash outflows for at least the next 12 months. As of March 31, 2018, the Company
had cash and a working capital deficit of $42,520,518 and $109,001,531, respectively. Of the working capital deficit, $70,730,100
pertained to warrant and derivative liabilities classified on the balance sheet within short term liabilities. Management has
evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations
and concluded that, without additional funding, the Company will not have sufficient funds to meet its obligations within one
year from the date the condensed consolidated financial statements were issued. While management will look to continue funding
operations by raising additional capital from sources such as sales of its debt or equity securities or loans in order to meet
operating cash requirements, there is no assurance that management’s plans will be successful.
The Company obtained
convertible debt financing for up to $60,000,000 in gross proceeds on January 11, 2018, of which the Company had received $25,000,000
in gross proceeds as of March 31, 2018, which the Company used (i) to increase the Company’s ownership interests or other
rights and interests in MoviePass; (ii) to satisfy certain indebtedness; and (iii) for general corporate purposes and transaction
expenses. The Company may also use the proceeds to make other acquisitions. The Company had $695,270 of make-whole principle balance
outstanding under the Senior Convertible Notes issued to institutional investors on November 7, 2017 and January 23, 2018, and
there remained $114,350,000 in restricted principal for which a corresponding amount of principal under the investor notes remains
to be paid to the Company by the holders of those convertible notes.
In order to facilitate
the Company’s further access to capital, in January 2018 the Company filed a shelf registration statement on form S-3 that
was declared effective by the Securities and Exchange Commission on February 9, 2018, which allows the Company to offer and sell
up to $400,000,000 of its equity or equity-linked securities. This aggregate offering amount includes up to $150 million of common
stock that the Company may sell at prevailing market prices in a continuous at-the market offering through its sales agent Canaccord
Genuity LLC. Using the shelf registration statement, the Company completed an underwritten public offering of common stock and
warrants for gross proceeds of approximately $105.0 million on February 13, 2018. The total net proceeds to the Company from the
public offering were $96.9 million.
Without raising additional
capital, there is substantial doubt about the Company’s ability to continue as a going concern through May 15, 2019. The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities
in the normal course of business. A successful transition to attaining profitable operations is dependent upon achieving a level
of positive cash flows adequate to support the Company’s cost structure.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
Acquisition of Controlling Interest
in MoviePass Inc.
On December 11, 2017,
the Company completed its acquisition of a 62.41% majority interest in MoviePass Inc., a Delaware corporation (“MoviePass”,
and such acquisition, the “MoviePass Transaction”), for the following consideration: (1) a subordinated convertible
promissory note in the principal amount of $12,000,000 (the “Helios Convertible Note”), which is convertible into shares
of HMNY’s common stock, as further described below; (2) a $5,000,000 promissory note issued to MoviePass (the “Helios
Note”); (3) the exchange of a convertible promissory note issued by MoviePass to HMNY in an aggregate principal amount of
$11,500,000 (plus accrued interest thereon); (4) $1,000,000 in cash to purchase outstanding convertible notes of MoviePass, which
were converted into shares of MoviePass’ common stock amounting to an additional 2% of the outstanding shares of MoviePass
common stock; and (5) $20,000,000 in cash pursuant to the Investment Option Agreement, dated October 11, 2017, between the Company
and MoviePass.
The Helios Convertible
Note will convert into 4,000,000 unregistered shares of the Company’s common stock (the “Conversion Shares”)
automatically upon the Company’s receipt of approval of its stockholders relating to the issuance of the Conversion Shares
as required by and in accordance with Nasdaq Listing Rule 5635 (the “Stockholder Approval”). Of that amount, 666,667 of
the Conversion Shares are subject to forfeiture by MoviePass, in the Company’s sole discretion, as MoviePass failed to list
its common stock on the Nasdaq Stock Market by March 31, 2018 (as required by the securities purchase agreement between the Company
and MoviePass). As of the date of this report, the Company has not made a decision with respect to the disposition of those shares
that are subject to forfeiture.
The Company has valued
the Helios Convertible Note as of the acquisition date including the valuation of the shares subject to forfeiture as noted above,
at the fair value on the acquisition date based on a Monte Carlo simulation. The shares subject to forfeiture are contingent consideration
and have been valued as a separate component of the Helios Convertible Note. As of the acquisition date the Helios Convertible
Note was valued at $29,000,000 and the portion of the Conversion Shares subject to forfeiture was valued at $5,152,446. All of
the purchase consideration, with the exception of the $1,000,000 paid for the MoviePass convertible notes which were converted
into MoviePass common stock, was retained by MoviePass. Accordingly, the value of the Helios Convertible Note, the Helios Note
and the value associated with the Conversion Shares subject to forfeiture are eliminated in consolidation for financial reporting
purposes.
Goodwill recognized
as part of the MoviePass acquisition is not expected to be tax deductible.
The Company has determined
preliminary fair values of the assets acquired and liabilities assumed in the MoviePass Transaction. These values are subject to
change as management performs additional reviews of the assumptions utilized.
The Company has made
a provisional allocation of the purchase price of the MoviePass Transaction to the assets acquired and the liabilities assumed
as of the acquisition date. The following table summarizes the provisional purchase price allocations relating to the MoviePass
Transaction.
Purchase consideration:
|
|
MoviePass
|
|
Cash
|
|
$
|
32,671,792
|
|
Notes payable (includes Helios Convertible Note and Helios Note)
|
|
|
39,152,446
|
|
Fair value of consideration transferred
|
|
$
|
71,824,238
|
|
|
|
|
|
|
Recognized amounts of identifiable assets and liabilities acquired:
|
|
|
|
|
Cash acquired
|
|
$
|
1,106,171
|
|
Accounts receivable
|
|
|
9,669,390
|
|
Notes receivable
|
|
|
39,152,446
|
|
Investment option payment receivable
|
|
|
7,850,000
|
|
Prepaid expenses and other current assets
|
|
|
192,180
|
|
Property and equipment
|
|
|
39,320
|
|
Other assets
|
|
|
8,000
|
|
Identifiable intangible assets:
|
|
|
|
|
Tradenames and trademarks
|
|
|
19,550,000
|
|
Technology
|
|
|
3,800,000
|
|
Customer relationships
|
|
|
2,560,000
|
|
Liabilities assumed
|
|
|
(9,261,785
|
)
|
Deferred revenue
|
|
|
(38,718,397
|
)
|
Non-controlling interest
|
|
|
(43,260,264
|
)
|
Goodwill
|
|
|
79,137,177
|
|
Total purchase price allocation
|
|
$
|
71,824,238
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated
Financial Statements
The Company has not
completed the valuation studies necessary to finalize the acquisition fair values of the assets acquired and liabilities assumed
and related allocation of purchase price for the MoviePass Transaction. Accordingly, the type and value of the intangible assets
and deferred revenue amounts set forth above are preliminary. Once the valuation process is finalized for the MoviePass Transaction,
there could be changes to the reported values of the assets acquired and liabilities assumed, including goodwill, intangible assets
and deferred revenue and those changes could differ materially from what is presented above.
The Company determined
the provisional fair value of the acquired intangible assets through a combination of the market approach and the income approach.
The significant assumptions used in certain valuations associated with the MoviePass Transaction include discount rates ranging
from 10.0% to 51.0%. In determining the value of tradenames and trademarks the Company observed royalty rates ranging from 0.0%
to 100.0%, and utilized a 1.0% rate for MoviePass’s aggregated tradenames and trademarks. Additionally, the Company observed
royalty rates related to MoviePass’s technology assets acquired ranging from 0.0% to 50.0%, and used a 1.0% royalty rate
in determining the fair value of the acquired technology. In accordance with EITF guidance, the fair value of an acquired liability
related to deferred revenue would include the direct and incremental cost of fulfilling the obligation plus a normal profit margin.
The Company utilized historical operating results in estimating the direct and incremental costs of fulfilling the acquired deferred
revenue obligations. The Company recorded an amount of $43,260,264 representing the non-controlling interest of MoviePass. The
non-controlling interest in MoviePass was determined based on the fair value of MoviePass less the amounts paid by the Company
for its 62.41% controlling interest.
The estimated useful
lives of acquired intangible assets are 7 years for customer relationships, 3 years for technology, and 7 years for tradenames
and trademarks. Acquired deferred revenue is estimated to be realized based on the length of the subscription, over 12 months from
the acquisition date.
Additional MoviePass Subscription Agreements
On March 8, 2018, the
Company entered into a Subscription Agreement with MoviePass (the “March 2018 Agreement”), pursuant to which, in lieu
of repayment of advances totaling $55,525,000 made by the Company, MoviePass agreed to sell to the Company an amount of MoviePass
Common Stock equal to 18.79% of the total then outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass
options and warrants) (the “March 2018 MoviePass Purchased Shares”). MoviePass also agreed to issue to the Company,
in addition to the March 2018 MoviePass Purchased Shares, without payment of additional consideration by the Company, for purposes
of anti-dilution, an amount of shares of MoviePass Common Stock that caused the Company’s total ownership of the outstanding
shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants), together with the March 2018 MoviePass
Purchased Shares, to equal 81.2% as of March 8, 2018.
The Company
has accounted for the March 2018 MoviePass Purchased Shares as an acquisition of a portion of the non-controlling interest in MoviePass.
Accordingly, the non-controlling interest at March 8, 2018 was reduced based on the percentage acquired, and the balance invested
in excess of the value of the non-controlling interest acquired was recorded as additional invested capital.
HELIOS
AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated
Financial Statements
6.
|
Net
Income/(Loss) Per Share Attributable to Common Stockholders
|
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 is computed by dividing income available to common stockholders (the numerator)
by the weighted-average number of common shares outstanding (the denominator) during the period. The computation of diluted EPS
is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the
potential dilution that could occur from common shares issuable through contingent shares issuance arrangements, stock options
or warrants. The calculation of diluted EPS excludes 4,934,555 shares for securities deemed to be anti-dilutive.
The following sets
forth the computation of diluted EPS for the three months ended March 31, 2018 and March 31, 2017:
|
|
Three months ended March 31, 2018
|
|
|
|
Net Income Available to Common Stockholders (Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
Basic EPS
|
|
$
|
5,175,875
|
|
|
|
34,850,281
|
|
|
$
|
0.15
|
|
Assumed conversion of convertible notes
|
|
|
(1,940,056
|
)
|
|
|
-
|
|
|
|
-
|
|
Dilutive shares related to warrants and convertible notes
|
|
|
-
|
|
|
|
1,752,086
|
|
|
|
-
|
|
Dilutive EPS
|
|
$
|
3,235,819
|
|
|
|
36,602,367
|
|
|
$
|
0.09
|
|
|
|
Three months ended March 31, 2017
|
|
|
|
Net Loss Available to Common Stockholders (Numerator)
|
|
|
Shares (Denominator)
|
|
|
Per Share Amount
|
|
Basic EPS
|
|
$
|
(6,496,732
|
)
|
|
|
5,530,083
|
|
|
$
|
(1.17
|
)
|
Dilutive shares related to warrants and convertible notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive EPS
|
|
$
|
(6,496,732
|
)
|
|
|
5,530,083
|
|
|
$
|
(1.17
|
)
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated
Financial Statements
7
.
|
Prepaid Expenses
and Other Current Assets
|
Prepaid expenses and
other current assets consisted of the following on March 31, 2018 and December 31, 2017:
|
|
March 31,
2018
|
|
|
December 31, 2017
|
|
Vendor deposits
|
|
$
|
152,285
|
|
|
$
|
147,533
|
|
Tax
|
|
|
99,407
|
|
|
|
108,433
|
|
Deposits
|
|
|
226,750
|
|
|
|
230,711
|
|
Insurance
|
|
|
78,797
|
|
|
|
86,181
|
|
Professional fees and services
|
|
|
549,140
|
|
|
|
33,333
|
|
Deferred stock compensation
|
|
|
2,054,341
|
|
|
|
2,885,278
|
|
Rent
|
|
|
42,779
|
|
|
|
52,650
|
|
Other
|
|
|
63,828
|
|
|
|
13,692
|
|
Total prepaid expenses and other current assets
|
|
$
|
3,267,327
|
|
|
$
|
3,557,811
|
|
8.
|
Intangible Assets, net
|
The following table
sets forth the major categories of the Company’s intangible assets and the estimated useful life as of March 31, 2018 and
December 31, 2017 for those assets that are not already fully amortized:
|
|
Estimated
|
|
|
Gross
|
|
|
March 31, 2018
|
|
|
|
Useful Life (Years)
|
|
|
Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Impairments
|
|
|
Net Book Value
|
|
Customer relationships
|
|
|
7
|
|
|
$
|
2,560,000
|
|
|
$
|
(112,074
|
)
|
|
$
|
-
|
|
|
$
|
2,447,926
|
|
Technology
|
|
|
3
|
|
|
|
8,070,000
|
|
|
|
(2,373,259
|
)
|
|
|
-
|
|
|
|
5,696,741
|
|
Tradenames and trademarks
|
|
|
7
|
|
|
|
19,550,000
|
|
|
|
(599,113
|
)
|
|
|
-
|
|
|
|
18,950,887
|
|
Patents
|
|
|
12
|
|
|
|
196,353
|
|
|
|
(12,196
|
)
|
|
|
-
|
|
|
|
184,157
|
|
|
|
|
|
|
|
$
|
30,376,353
|
|
|
$
|
(3,096,642
|
)
|
|
$
|
-
|
|
|
$
|
27,279,711
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated
Financial Statements
|
|
Estimated
|
|
|
Gross
|
|
|
December
31, 2017
|
|
|
|
Useful Life (Years)
|
|
|
Carrying Amount
|
|
|
Acquisitions
|
|
|
Accumulated Amortization
|
|
|
Impairments
|
|
|
Net Book Value
|
|
Customer relationships
|
|
|
7
|
|
|
$
|
-
|
|
|
$
|
2,560,000
|
|
|
$
|
(20,645
|
)
|
|
$
|
-
|
|
|
$
|
2,539,355
|
|
Technology
|
|
|
3
|
|
|
|
4,270,000
|
|
|
|
3,800,000
|
|
|
|
(1,700,431
|
)
|
|
|
-
|
|
|
|
6,369,569
|
|
Tradenames and trademarks
|
|
|
7
|
|
|
|
1,977,000
|
|
|
|
19,550,000
|
|
|
|
(433,588
|
)
|
|
|
(1,653,776
|
)
|
|
|
19,439,636
|
|
Broker relationships
|
|
|
5
|
|
|
|
4,200
|
|
|
|
-
|
|
|
|
(962
|
)
|
|
|
(3,238
|
)
|
|
|
-
|
|
Patents
|
|
|
12
|
|
|
|
196,353
|
|
|
|
-
|
|
|
|
(8,131
|
)
|
|
|
-
|
|
|
|
188,222
|
|
|
|
|
|
|
|
$
|
6,447,553
|
|
|
$
|
25,910,000
|
|
|
$
|
(2,163,757
|
)
|
|
$
|
(1,657,014
|
)
|
|
$
|
28,536,782
|
|
The Company recorded
amortization expense of $1,255,859 and $426,651 for the three months ended March 31, 2018 and 2017, respectively.
The following table
outlines estimated future annual amortization expense for the next five years and thereafter:
March 31,
|
|
|
|
Remaining 2018
|
|
$
|
3,770,233
|
|
2019
|
|
|
4,821,384
|
|
2020
|
|
|
3,532,137
|
|
2021
|
|
|
2,336,976
|
|
2022
|
|
|
2,336,976
|
|
Thereafter
|
|
|
10,482,005
|
|
|
|
$
|
27,279,711
|
|
|
9.
|
Accounts
Payable and Accrued Expenses
|
As of March 31, 2018
and December 31, 2017, accounts payable and accrued expenses consisted of the following:
|
|
March 31,
2018
|
|
|
December 31, 2017
|
|
Accounts payable
|
|
$
|
5,412,887
|
|
|
$
|
5,087,060
|
|
Accrued ticket expense
|
|
|
1,852,876
|
|
|
|
4,743,582
|
|
Accrued professional fees
|
|
|
2,719,192
|
|
|
|
597,187
|
|
Accrued credit card fees
|
|
|
-
|
|
|
|
782,670
|
|
Accrued payroll expense
|
|
|
1,079,841
|
|
|
|
312,149
|
|
Accrued other expense
|
|
|
869,818
|
|
|
|
852,840
|
|
Accrued interest
|
|
|
1,393,476
|
|
|
|
768,515
|
|
Total accounts payable and accrued expenses
|
|
$
|
13,328,090
|
|
|
$
|
13,144,003
|
|
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
10.
|
Senior Secured Convertible Notes and Warrants
|
On February 8, 2017,
the Company issued two Senior Secured Convertible Notes (the “February 2017 Notes”) to an institutional investor (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 Investor Note”) which
offsets the February 2017 notes of the same amount. Upon issuance, the initial note with a principal balance of $681,818 was accounted
for as an original issuance discount and accreted into interest expense over the life of the February 2017 Notes. As cash payments
are applied to the February 2017 Investor Note, a derivative liability is recognized and placement agent warrants are issued. Both
the derivative liability and the warrants are accounted for as debt discount to the February 2017 Notes and accreted into interest
expense over the life of the note using the effective interest method. The February 2017 Notes had a maturity date of October 8,
2017. As of December 31, 2017, the Investor had fully prepaid the February 2017 Investor Note and had subsequently converted the
principal amount due under the February 2017 Notes and approximately $49,000 of interest into 1,852,886 shares of the Company’s
common stock in full payment of the February 2017 Notes. On any principal balance owed by the Company to the Investor, a 6% interest
obligation was due quarterly and calculated on a 360-day basis. For the three months ended March 31, 2018 and March 31, 2017, the
Company had interest expense of $0 and $10,277, respectively, related to the February 2017 Notes as the final principal balance
was converted in August 2017. In a letter agreement executed on August 27, 2017, in consideration for the prepayment in the amount
of $2,500,000, on the February 2017 Investor Note, which the Investor subsequently made on August 28, 2017, the Investor and the
Company agreed that the Investor would have the right, but not the obligation, until December 31, 2017, to effect an exchange (the
“Share Exchange”) of 841,250 shares of the Company’s common stock (the “Exchange Shares”) for one
or more senior secured convertible promissory notes in the form of the February Additional Note (the “New Note”), with
the right to substitute the alternate conversion price of the New Note with the alternate conversion price of the Company’s
Series B Senior Secured Convertible Note (the “Series B Note”) that was issued on August 16, 2017. Any New Note issued
would be in a principal amount equal to the product of the prepayment amount ($2,500,000) multiplied by a fraction, the numerator
of which is the number of the aggregate shares being tendered to the Company in the Share Exchange and the denominator of which
is 841,250. The maturity date of any New Note was 45 days following the issuance of the New Note, and the conversion price of the
New Notes was $4.50, or, at the election of the Investor, the Investor could convert at the Alternate Conversion Price. The Alternate
Conversion Price was defined as either (A) the lower of (i) $4.50 and (ii) the greater of (I) $4.00 and (II) 85% of the quotient
of (x) the sum of the volume weighted average price of the common stock for each of the 5 consecutive trading days ending on the
trading day immediately preceding the delivery of the Conversion Notice, divided by (y) 5 or (B) that price which shall be the
lowest of (i) $3.00 and (ii) the greater of (I) the Floor Price then in effect and (II) 85% of the quotient of (x) the sum of the
volume weighted average price of the Company’s common stock for each of the 5 consecutive trading days ending and including
the date of the alternate conversion, divided by (y) 5. The Floor Price was defined as $3.00 through October 4, 2017 and $0.50
following October 4, 2017. On October 23, 2017, the Company and the Investor entered into a Third Amendment and Exchange Agreement
(the “Third Exchange Agreement”) for the purpose of exchanging the New Note for 947,218 shares of common stock (the
“New Exchange Shares”) and rights (the “Rights”) to receive 552,782 additional shares of common stock.
As partial consideration for the New Exchange Shares and the Rights, the Investor agreed, among other things, to terminate the
Investor’s right to exchange the remaining Exchange Shares for New Notes. The termination of these rights is accounted for
as financing fees associated with the February 2017 Notes and valued at $19,950,000 based on the trading price of the Company’s
stock on the date of the Third Exchange Agreement.
On August 16, 2017,
the Company issued to the Investor three Senior Secured Convertible Notes (the “August 2017 Notes”) in the aggregate
principal amount of $10,300,000 and a 5-year warrant for the purchase of 1,892,972 shares of the Company’s common stock at
an exercise price of $3.25 per share (the “Investor Warrant”) for consideration consisting of a secured promissory
note payable by the Investor to the Company (the “August 2017 Investor Note”) in the principal amount of $8,800,000
and $220,000 which offsets the August 2017 Notes of the same amount. The August 2017 Notes have a maturity date of April 16, 2018
and the Investor Warrant will expire on April 16, 2022. The $220,000 secured promissory note payable by the Investor was issued
in exchange for a $250,000 Senior Secured Convertible Note; therefore, a discount of $30,000 was recognized upon issuance and accreted
into interest expense over the life of the note using the effective interest method. Upon issuance, the Investor Warrant was recorded
at fair value and accounted for as an original issuance discount to the August 2017 Notes. The excess in value of the Investor
Warrant over the August 2017 Notes upon issuance was recorded as interest expense, while the capitalized balance was accreted into
interest expense over the life of the August 2017 Notes. At December 31, 2017, the contracted conversion prices for the August
2017 Notes, which include an Initial Series A Note, an Additional Series A Note and the Series B Note, were $4.00 for the Initial
Series A Note and the Additional Series A Note and $3.00 for the Series B Note. As of December 31, 2017, the Investor had fully
prepaid the August 2017 Investor Note and subsequently converted $5,794,560 in principal amount, plus accrued interest, of the
August 2017 Notes into 1,482,639 shares of the Company’s common stock. As of December 31, 2017, the unpaid principal amount
of the August 2017 Notes owed to the Investor was $4,505,440. On any principal balance owed by the Company to the Investor, a 6%
interest obligation is due quarterly and calculated on a 360-day basis. For the three months ended March 31, 2018, the Company
had $37,126 of interest expense pertaining to the unpaid principal amount of the August 2017 Notes. The full outstanding principal
balance of $4,677,899 and accrued interest of $37,126 were converted to 1,169,475 shares of the Company’s common stock on
February 20, 2018.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
The Investor Warrant
included anti-dilution provisions. The anti-dilution provisions were triggered when the Company issued a new senior convertible
note to the Investor in the aggregate principal amount of $697,000 (the “Exchange Note”). Because the Exchange Note
had a conversion price of $3.00 per share, which was lower than the Investor Warrant per share exercise price of $3.25, the number
of shares of the Company’s common stock issuable to the Investor pursuant to the Investor Warrant was increased from 1,892,972
to 2,050,720 and the per share exercise price of the Investor Warrant was decreased from $3.25 to $3.00. As of December 31, 2017,
the Investor had elected, in a cashless transaction, to exercise the Investor Warrant to purchase 1,715,006 shares of common stock
and also paid the Company the sum of $977,142 to exercise the Investor Warrant for an additional 325,714 shares of common stock.
On November 21, 2017 in conjunction with the Fourth Amendment and Exchange Agreement, the remaining 10,000 shares of common stock
subject to the Investor Warrant were exchanged for a new warrant (the “Exchange Warrant”). The Exchange Warrant is
in substantially the form of the Investor Warrant, except that:
|
●
|
The Exchange Warrant has an exercise price of $14.31.
|
|
●
|
The expiration date of the Exchange Warrant is November 21, 2022.
|
|
●
|
The Exchange Warrant may not be exercised for the purchase of shares of common stock unless the stockholders of the Company approve the issuance in compliance with the rules and regulations of the Nasdaq Capital Market, which stockholder approval was obtained at a special meeting of the Company’s stockholders in October 2017.
|
|
●
|
The Exchange Warrant is subject to redemption, refund or alternate cashless exercise after the August Note is no longer outstanding (or on or after February 16, 2018 if the Company fails to remain current in its filings or an event of default under the August 2017 Notes occurs).
|
In exchange for the
Company’s receipt of the waivers described above, including without limitation, the Additional Offering Prohibition Waiver,
the Company and the holder of the Exchange Warrant agreed that after the Adjustment Time, one of the following shall occur:
(i) if the net proceeds
from the sale of shares of common stock issuable upon conversion of the Remaining August Note by the holder of the Exchange Warrant
exceeds $18.1 million (subject to reduction for any cash payment of the Remaining August Note), the Company will receive up to
the first $5 million in excess of such amount;
(ii) if the net proceeds
from the sale of shares of common stock issuable upon conversion of the Remaining August Note by the holder of the Exchange Warrant
is less than $18.1 million (subject to reduction for any cash payment of the Remaining August Note) (such difference, the “Redemption
Maximum Amount”), either of the following may occur:
|
●
|
If the Stockholder Approval has been obtained, the holder of the Exchange Warrant
may request to affect an alternate cashless exercise of the Exchange Warrant, in whole or in part, pursuant to which, in lieu of
the shares of common stock issuable upon exercise of the Exchange Warrant, the holder would receive up to the Redemption Maximum
Amount in shares of common stock at the Alternate Cashless Exercise Price (as defined below) (an “Alternate Cashless Exercise”);
or
|
|
●
|
The holder of the Exchange Warrant may request a redemption in cash of all,
or any part, of the Exchange Warrant at a price equal to such difference; provided, that if certain equity conditions are met (including
obtaining the Stockholder Approval), the Company may elect to pay such redemption price in shares of common stock in an Alternate
Cashless Exercise.
|
The Alternate Cashless
Exercise Price is defined as that price which shall be the greater of (x) $2.86 and (y) the lowest of (i) the applicable exercise
price as in effect on the applicable exercise date, (ii) 85% of the VWAP of the shares of common stock as of the trading day immediately
preceding the trading day of delivery of the applicable exercise notice, and (iii) 85% of the lowest VWAP of the shares of common
stock on any trading day during the 2 trading day period commencing on, and including, the trading day of the delivery of the applicable
exercise notice.
In March 2018, the
Investor converted the entire Exchange Warrant into 3,265,186 shares of our common stock at pursuant to an Alternate Cashless Exercise.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
With the issuance of
the Exchange Warrant, the resulting cash flows of the remaining Investor Warrant were considered to be significantly modified within
the context of ASC 470. Accordingly, the incremental change in fair value between the Investor Warrant and the Exchange Warrant
is calculated as $12,878,864 and recorded as interest expense. In March of 2018 the Investor exercised the Exchange Warrant by
means of a cashless exercise into 4,353,581 shares of common stock and a cash payment from the Company of $779,219, resulting in
a reduction of the warrant liability and corresponding adjustment to Additional Paid in Capital.
On November 7, 2017,
the Company issued two Senior Secured Convertible Notes in the aggregate principal amount of $100,000,000 (collectively, the “November
2017 Notes”) to institutional investors. The November Notes consist of a Senior Secured Convertible Note in the amount of
$5,000,000 (the “November Initial Note”) and a Senior Secured Convertible Note in the amount of $95,000,000 (the “November
Additional Note”) in exchange for an upfront cash payment of $5,000,000 and a senior secured promissory note of $95,000,000
(the “November 2017 Investor Note”). As of December 31, 2017, purchasers of the November 2017 Notes prepaid $15,650,000
of the November 2017 Investor Note with the remaining principal being subject to master netting agreements between the Company
and such holders. In conjunction with the prepayment, the Company was also obligated to pay the holders interest which would have
accrued with respect to the outstanding balance for the period from the redemption date through the maturity date (the “Make-Whole
Interest”). The Company elected to defer payment of the Make-Whole Interest by capitalizing the full balance under the same
terms as the original November 2017 Notes. As of December 31, 2017 the outstanding balance owed on the Make-Whole Interest was
$2,943,069. On January 2, 2018, an additional $646,263 of interest was capitalized and added to the principal balance of the note
and on January 26, 2018 investors redeemed principal of $2,894,062 in exchange for cash. The November 2017 Notes have a maturity
date of November 7, 2019. As of December 31, 2017, the contracted conversion price for the November 2017 Notes, which include both
the November Initial Note and November Additional Note, was $12.06. As of December 31, 2017, the Investors had converted $0 of
the November 2017 Notes into shares of the Company’s common stock. On any unfunded principal balance of the November 2017
Investor Notes the Company owed to the Investors a 5.25% interest obligation which is due quarterly and calculated on a 360-day
basis. For the funded portion of the November 2017 Notes the Company has a 10% interest obligation. For the three months ended
March 31, 2018, the Company had $1,394,169 of interest expense pertaining to the November 2017 Notes and $1,394,169 accrued at
March 31, 2018.
On January 23, 2018,
pursuant to a securities purchase agreement (the “SPA”) entered into by the Company and an institutional investor (the
“Buyer”), the Company sold and issued senior convertible notes in the aggregate principal amount of $60,000,000 (each,
a “Note” and collectively, the “Notes”), consisting of (i) a Series A-1 Senior Bridge Subordinated Convertible
Note in the aggregate principal amount of $25,000,000 (the “Series A-1 Note”) and (ii) a Series B-1 Senior Secured
Bridge Convertible Note in the aggregate principal amount of $35,000,000 (the “Series B-1 Note”) for consideration
consisting of (i) a cash payment in the aggregate amount of $25,000,000 (the “Cash Amount”), and (ii) a secured promissory
note payable by the Buyer to the Company (the “Investor Note”) in the aggregate principal amount of $35,000,000 (the
“Financing”). The date on which the Notes were issued is referred to as the “Closing Date.”
Unless earlier converted
or redeemed, the Notes will mature on the second anniversary of the Closing Date. The Company is required to redeem the Notes (i)
at the option of the Buyer from and after June 7, 2018; (ii) at the option of the Buyer if the Company completes a subsequent public
or private offering of debt or equity securities, including equity-linked securities (subject to certain excluded issuances); (iii)
upon the occurrence of an Event of Default, including a Bankruptcy Event of Default (each, as defined in the Notes); or (iv) in
the event of a Change of Control (as defined in the Notes). With the exception of a redemption required by an Event of Default,
which may be paid with cash or shares of the Company’s common stock at the election of the Buyer, the Company will be required
to redeem the Notes with cash. The Notes and the shares of common stock into which the Notes may be converted (collectively, the
“Conversion Shares”) are sometimes referred to in this report as the “Securities.” All amounts outstanding
under the Notes will be secured by the Investor Note and all proceeds therefrom. The Notes will not be secured by, and the Investors
will not have a lien on, any assets of the Company other than the Investor Note.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
MoviePass Inc. has
guaranteed the obligations arising under the Notes in accordance with the terms of a Guaranty (the “MoviePass Guaranty”).
In accordance with
the terms of the SPA, the Company is obligated to convene a special meeting of its stockholders on or prior to June 1, 2018, for
the purpose of approving the issuance of all Securities that may be issued in connection with the Financing.
Provided there has
been no Equity Conditions Failure (as defined in the Notes) and, as to the Series A-1 Note, no senior secured convertible notes
issued by the Company on August 16, 2017 (the “August Notes”) or senior convertible bridge notes issued by the Company
on November 7, 2017 (the “November Notes”) remain outstanding, and as to the Series B-1 Note, no August Notes, November
Notes, Series A-1 Note or Series B-1 Note with any Unrestricted Principal remain outstanding, the Company will have the right to
redeem all, but not less than all, of the Outstanding Amount remaining unpaid under the Notes. The portion of the Notes subject
to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. Under the Series B-1
Note, the Company may reduce, on a dollar for dollar basis, the Restricted Principal by the surrender for cancellation of such
portion of the corresponding Investor Note equal to the amount of Restricted Principal included in the redemption.
The Buyer has the right
to require the Company to redeem the Notes (i) at the option of the Buyer from and after June 7, 2018; (ii) if the Company completes
a Subsequent Placement, as defined in the SPA; (iii) upon the occurrence of an Event of Default, including a Bankruptcy Event of
Default (as defined in the Notes); or (iv) in the event of a Change of Control. With the exception of a redemption required by
an Event of Default, which may be paid with cash or shares of the Company’s common stock at the election of the Buyer, the
Company will be required to redeem the Notes with cash.
On February 13, 2018,
the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Canaccord Genuity Inc., on behalf
of itself and as representative of the underwriters named therein (the “Underwriters”), pursuant to which the Company
agreed to issue and sell to the Underwriters in a best-efforts underwritten public offering (the “Offering”) up to
approximately $105 million in gross proceeds of securities of the Company including (A) 7,425,000 Series A-1 units (the “Series
A-1 Units”), with each Series A-1 Unit consisting of (i) one share (a “Share”) of the Company’s common
stock, par value $0.01 per share (the “Common Stock”), and (ii) one Series A-1 warrant to purchase one share of Common
Stock (a “Series A-1 Warrant”); and for those purchasers whose purchase of Series A-1 Units would result in the purchaser,
together with its affiliates and certain related parties, beneficially owning more than 9.99% of the Company’s outstanding
Common Stock following the consummation of the Offering, (B) 11,675,000 Series B-1 units (the “Series B-1 Units”, and
together with the “Series A-1 Units”, the “Units”), consisting of (i) one pre-funded Series B-1 warrant
to purchase one share of Common Stock (a “Series B-1 Warrant”; and the Series B-1 Warrants, together with the Series
A-1 Warrants, the “Warrants”) and (ii) one Series A-1 Warrant. The Units were sold at a price to the public equal to
$5.50 per Unit.
Each Warrant is exercisable
at any time on or after the issuance date until the five-year anniversary of the issuance date. Each Series A-1 Warrant is exercisable
at a price of $6.50 per share of Common Stock. Each Series B-1 Warrant has an aggregate exercise price of $5.50 per share of Common
Stock, all of which will be pre-funded except for a nominal exercise price of $0.001 per share of Common Stock. The Warrants will
not be listed on The NASDAQ Capital Market or any other securities exchange. As of the date of this report, all Series B-1 Warrants
have been exercised.
The Company received
approximately $96,923,231 in net proceeds from the sale of the Units, after deducting underwriting discounts and commissions equal
to $5,882,800 and estimated offering expenses of approximately $450,000, not taking into account any exercise of the Warrants.
HELIOS AND MATHESON
ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
The
Placement Agent Notes and Warrants
The Company entered
into an agreement with a placement agent (the “Placement Agent”) for assistance with the placement of the February
2017 Notes. The Placement Agent accepted from the Company a 5-year warrant (each a “February Placement Agent Warrant”)
as partial payment for the Placement Agent’s services. The February Placement Agent Warrants allow the purchase of up to
8% of the number of shares of the Company’s common stock into which the unrestricted principal of the February 2017 Notes
may be converted. Through the first nine months of 2017, the Company received $5,000,000 of cash payments for the February 2017
Notes, resulting in the issuance of February Placement Agent Warrants for the purchase of 133,334 shares of common stock at an
exercise price of $3.00 per share. As of March 31, 2018 the Placement Agent has not elected to exercise any February Placement
Agent Warrants.
The Company entered
into an agreement with the Placement Agent for assistance with the placement of the August 2017 Notes and Investor Warrant. The
Placement Agent accepted from the Company a 5-year warrant (each, an “August Placement Agent Warrant”) as partial payment
for the Placement Agent’s services. The August Placement Agent Warrant allows the purchase of up to 8% of the number of shares
of the Company’s common stock into which the unrestricted principal of the Additional Series A Note and the Series B Note
in the combined principal amount of $9,050,000 becomes convertible at an exercise price equal to the greater of the exercise price
of the August 2017 Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement
Agent becomes entitled to the August Placement Agent Warrant. During the period ended December 31, 2017, the Company received $8,800,000
of cash payments in conjunction with the August 2017 Notes and issued August Placement Agent Warrants for the purchase of 176,000
shares of common stock at exercise prices of $3.00 and $14.27 per share. As of March 31, 2018, the Placement Agent has not elected
to exercise any August Placement Agent Warrants.
The Company entered
into an agreement with the Placement Agent for assistance with the placement of the November 2017 Notes. The Placement Agent accepted
from the Company a 5-year warrant (each, a “November Placement Agent Warrant”) as partial payment for the Placement
Agent’s services. The November Placement Agent Warrant allows the purchase of up to 8% of the number of shares of the Company’s
common stock into which the unrestricted principal of the November Series A Note and the November Series B Note in the combined
principal amount of $100,000,000 becomes convertible at an exercise price equal to the greater of the exercise price of the November
2017 Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement Agent becomes
entitled to the November Placement Agent Warrant. During the period ended March 31, 2018, the Company received no cash payments
for the November 2017 Notes resulting in no issuances of warrants at an exercise prices of $12.06 per share. As of March 31, 2018,
the Placement Agent has not elected to exercise any November Placement Agent Warrants.
HELIOS AND MATHESON ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
Note
Activity:
Senior Secured Convertible
Notes consist of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
August 2017 Notes
|
|
$
|
-
|
|
|
$
|
2,061,072
|
|
November 2017 Notes
|
|
|
641,206
|
|
|
|
1,550,555
|
|
|
|
$
|
641,206
|
|
|
$
|
3,611,627
|
|
Under
ASC 210-20-45-1, management offset the Notes by the Investor Notes yet to be funded. As of March 31, 2018, there was no unfunded
portion of the Investor Note remaining.
The carrying value
of the Senior Secured Convertible Notes is comprised of the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
August 2017 Notes
|
|
$
|
-
|
|
|
$
|
4,505,440
|
|
November 2017 Notes
|
|
|
695,270
|
|
|
|
2,943,069
|
|
Unamortized discounts
|
|
|
(54,064
|
)
|
|
|
(3,836,882
|
)
|
|
|
$
|
641,206
|
|
|
$
|
3,611,627
|
|
During the three months
ended March 31, 2018, the Investor has converted a total of $4,640,773 in principal and $37,126 in interest into 1,169,475 shares
of the Company’s common stock.
Warrant Activity:
The following is a
summary of the Company’s warrant activity during the three months ended March 31, 2018:
|
|
Warrant Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life Years
|
|
Outstanding/exercisable – December 31, 2017
|
|
|
9,631,588
|
|
|
$
|
6.04
|
|
|
|
4.86
|
|
Granted
|
|
|
30,949,826
|
|
|
|
6.15
|
|
|
|
4.88
|
|
Exercised
|
|
|
(10,860,000
|
)
|
|
|
5.51
|
|
|
|
4.88
|
|
Outstanding/exercisable – March 31, 2018
|
|
|
29,721,414
|
|
|
$
|
5.99
|
|
|
|
4.88
|
|
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
|
11.
|
Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis
|
Financial assets and
liabilities measured at fair value on a recurring basis are summarized below and disclosed on the Company’s consolidated
balance sheets as of March 31, 2018 and December 31, 2017:
|
|
Amount at
|
|
|
Fair Value Measurement Using
|
|
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – warrants
|
|
$
|
70,030,200
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70,030,200
|
|
Derivative liability – conversion feature
|
|
|
699,900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
699,900
|
|
Total
|
|
$
|
70,730,100
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70,730,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – warrants
|
|
$
|
67,288,800
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
67,288,800
|
|
Derivative liability – conversion feature
|
|
|
4,834,462
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,834,462
|
|
Total
|
|
$
|
72,123,262
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72,123,262
|
|
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 three months ended March 31, 2018:
|
|
Amount
|
|
Balance at December 31, 2017
|
|
$
|
72,123,262
|
|
Purchases, issuances and settlements
|
|
|
181,553,655
|
|
Conversions to paid in capital
|
|
|
(78,033,527
|
)
|
Extinguishment of convertible note
|
|
|
(2,707,712
|
)
|
Change in fair value of warrant liabilities
|
|
|
(93,608,200
|
)
|
Change in fair value of derivative liabilities
|
|
|
(8,597,378
|
)
|
Balance at March 31, 2018
|
|
$
|
70,730,100
|
|
The
fair value of the derivative conversion features and warrant liabilities as of March 31, 2018 and December 31, 2017 were calculated
using a Monte Carlo option model valued with the following weighted average assumptions:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
|
|
Amount
|
|
|
Amount
|
|
Dividend yield
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
Expected volatility
|
|
|
140
|
%
|
|
|
-
|
|
|
|
150
|
%
|
|
|
45
|
%
|
|
|
-
|
|
|
|
270
|
%
|
Risk free interest rate
|
|
|
1.50
|
%
|
|
|
-
|
|
|
|
2.67
|
%
|
|
|
1.06
|
%
|
|
|
-
|
|
|
|
2.20
|
%
|
Contractual term (in years)
|
|
|
0.15
|
|
|
|
-
|
|
|
|
5.00
|
|
|
|
0.19
|
|
|
|
-
|
|
|
|
5.00
|
|
Exercise price
|
|
$
|
3.000
|
|
|
$
|
-
|
|
|
$
|
12.060
|
|
|
$
|
0.001
|
|
|
|
-
|
|
|
$
|
14.310
|
|
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.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
|
12.
|
Stock
Based Compensation
|
The
Company has a stock-based compensation plan, which is described as follows:
On March 3, 2014, the
Board of Directors approved and adopted the Helios and Matheson Analytics Inc. 2014 Equity Incentive Plan (the “2014 Plan”)
which the Company’s stockholders approved at the annual stockholders meeting on May 5, 2014. The 2014 Plan as amended set
aside and reserved 3,000,000 shares of the Company’s common stock for grant and issuance in accordance with its terms and
conditions. Persons eligible to receive awards from the 2014 Plan include employees (including officers and directors) of the
Company and its affiliates, consultants who provide significant services to the Company or its affiliates, and directors who are
not employees of the Company or its affiliates (the “Participants”). The 2014 Plan permits the Company to issue to
Participants qualified and/or non-qualified options to purchase the Company’s common stock, restricted common stock, performance
units, and performance shares. The 2014 Plan will terminate on March 3, 2024. The Company’s Board of Directors is responsible
for administration of the 2014 Plan and has the sole discretion to determine which Participants will be granted awards and the
terms and conditions of the awards granted. The 2014 Plan also provides for an annual automatic increase in the number of shares
of common stock authorized for issuance thereunder by the lesser of (A) 3,000,000 shares of the Company’s common stock or
the equivalent of such number of shares after the administrator of the 2014 Plan, in its sole discretion, has interpreted the
effect of any stock split, stock dividend, combination, recapitalization or similar transaction; (B) a number of shares of common
stock equal to 5% of the Company’s common stock outstanding on January 2
nd
of each year, and (C) an amount
determined by the Company’s Board of Directors. A total of 2,610,000 shares of common stock remained available for issuance
as of March 31, 2018.
As
of March 31, 2018 there have not been any stock option grants made pursuant to the 2014 Plan.
From time to time the Board of Directors has also authorized the issuance of shares
of common stock outside of the 2014 Plan to consultants and employees for services rendered. During the three months ended March
31, 2018 the Company awarded 481,688 shares to consultants who provided services to the Company. In connection with such awards
(including awards granted in 2017) the Company recorded stock compensation expense of $3,747,851 which is included in selling,
general and administrative expenses in the three months ended March 31, 2018. Unamortized stock compensation costs related to
these awards of $2,054,341 will be recognized over the anticipated service period in 2018. During the three months ended March
31, 2018, the Company issued 1,202,167 shares of common stock to employees and consultants for services provided during 2017.
The Company recognized expense of $11,066,605, in the fourth quarter of 2017, with respect to such awards, and also recorded a
liability on the balance sheet at December 31, 2017, related to these costs which were settled in shares.
The shares historically
issued both pursuant to the 2014 Plan and outside the 2014 Plan have been fully vested in certain cases and subject to vesting
conditions in other cases; they generally contain resale or transfer restrictions pursuant to lock up agreements ranging from 18
to 24 months from the award date.
The Company generally
recognizes stock compensation expense on the grant date and over the period of vesting or period that services will be provided.
Compensation associated with shares issued or to be issued to consultants and other non-employees is recognized over the expected
service period beginning on the measurement date which is generally the time the Company and the service provider enter into a
commitment whereby the Company agrees to grant shares in exchange for the services to be provided.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
MoviePass,
Inc.
MoviePass maintained
the 2011 Equity Incentive Plan (the “2011 Plan”) during the three months ended March 31, 2018. The 2011 Plan provides
for the grant of up to 95,000,000 shares of common stock for issuance as non-statutory or incentive stock options, stock appreciation
rights, restricted stock and restricted stock units to the employees, officers, directors, or consultants of MoviePass. The 2011
Plan is administered by the Board of Directors of MoviePass, which selects the individuals to whom options will be granted, and
determines the number of options to be granted and the term and exercise price of each option. Stock options granted pursuant to
the terms of the 2011 Plan generally cannot be granted with an exercise price of less than 100% of the fair market value on the
date of grant. The term of the options granted under the 2011 Plan cannot be greater than 10 years. Options vest at varying rates
generally over three to five years along with performance-based options.
For the three months
ended March 31, 2018 MoviePass granted 39,809,175 stock options at an exercise price of $0.43 (43 cents) per share.
The following table summarizes stock option activity under the MoviePass share-based plan for the three
months ended March 31, 2018:
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
Options
for
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Common
Shares
|
|
|
Exercise
Price
|
|
|
Contractual
Term
|
|
|
Intrinsic
Value
|
|
Outstanding
as of December 31, 2017
|
|
|
28,396,428
|
|
|
$
|
0.14
|
|
|
|
9.13
|
|
|
$
|
8,313,684
|
|
Granted
|
|
|
39,809,175
|
|
|
$
|
0.43
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited,
cancelled, expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
as of March 31, 2018
|
|
|
68,205,603
|
|
|
$
|
0.31
|
|
|
|
9.44
|
|
|
$
|
6,117,060
|
|
Vested
and exercisable at March 31, 2018
|
|
|
16,249,800
|
|
|
|
0.13
|
|
|
|
8.91
|
|
|
|
3,556,413
|
|
The weighted average grant
date fair value per share of stock options granted during the three months ended March 31, 2018 was $0.16. No options were exercised
during the three months ended March 31, 2018 and March 31, 2017.
The Company recognized
share-based payment expense associated with stock options of $1,996,312 and $44,450 for the three months ended March 31, 2018 and
March 31, 2017, respectively.
The following table
summarizes the weighted-average assumptions used to compute the fair value of options granted to employees:
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
Risk-free interest rate
|
|
|
2.50
|
%
|
Expected life of options – years
|
|
|
5.79
|
|
Expected stock price volatility
|
|
|
37.20
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
There were no options
granted to the Company’s board of directors or third parties during the three months ended March 31, 2018.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
|
13.
|
Concentration
of Credit Risk
|
Consulting
For the three months
ended March 31, 2018 and March 31, 2017, respectively, 4 customers accounted for 94.7% and 87.0% of consulting revenues.
As of March 31, 2018
and December 31, 2017, respectively, 5 customers accounted for 90.5% and 4 customers accounted for 62.6% of consulting accounts
receivables.
As of March 31, 2018
and December 31, 2017, respectively, 5 vendors accounted for 98.4% and 3 vendors accounted for 82.7% of consulting accounts payables.
Technology
As of March 31, 2018
and December 31, 2017, respectively, 1 vendor accounted for 68.7% and 3 vendors accounted for 60.8% of technology accounts payables.
Subscription and Marketing and Promotional
Services
As of March 31, 2018
and December 31, 2017, respectively, 3 customers accounted for 98.4% of subscription accounts receivables and 2 customers accounted
for 100.0% for subscription accounts receivables.
As of March 31, 2018
and December 31, 2017, respectively, 7 vendors accounted for 73.7% subscription accounts payables and 1 vendor accounted for 41.0%
of subscription accounts payables.
|
14.
|
Commitments
and Contingencies
|
The
Company’s operating lease commitments at March 31, 2018 are comprised of the following:
|
|
Payments due by period
|
|
Less than 1 year
|
|
$
|
295,730
|
|
1 to 3 years
|
|
|
532,933
|
|
3 to 5 years
|
|
|
289,988
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,118,651
|
|
The Company’s
executive office is located at the Empire State Building, 350 Fifth Avenue, Suite 7520, New York, New York 10118. The Company’s
executive office is located in a leased facility with a term expiring on June 30, 2022. Zone rents two offices on a monthly basis
through WeWork. The offices are located at 350 Lincoln Road, Miami Beach, Florida. In addition, the Company’s Indian subsidiary
has an office in Bangalore, India at a leased facility located at 3rd Floor, Beta Block, Number 7 Sigma Tech Park, Varthur Kodi,
Bangalore 560066. This lease was amended on September 26, 2017 to extend the duration of the lease until September 30, 2019.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
The Company’s executive
office lease is subject to escalations based on increases in real estate taxes and operating expenses, all of which are charged
to rent expense. The lease agreement expires in June 2022. Rent expense for the three months ended March 31, 2018 and 2017 was
approximately $213,345 and $47,800, respectively.
In April 2017, Zone
signed a three-year lease agreement for office space in Miami. The lease term began in May 2017 and expires in April 2020 and requires
a monthly rent payment of $5,026 for the first 12 months, $5,177 for the next 12 months, and $5,332 for the last 12 months of the
lease.
As
of March 31, 2018, the Company does not have any “Off Balance Sheet Arrangements”.
Legal
Proceeding:
On February 23, 2018,
MoviePass filed a patent infringement complaint against Sinemia, Inc.in United States District Court, Central District of California.
MoviePass’s complaint asserts infringement of two U.S. patents, U.S. Patent Nos. 8,484,133 (“Secure targeted personal
buying/selling method and system”) and 8,612,325 (“Automatic authentication and funding method”) by Sinemia’s
movie-ticket subscription service. MoviePass’s complaint requests damages and an injunction. As of the date of this report,
Sinemia has not yet responded to the complaint due to an extension granted by MoviePass.
The Company is party
to routine litigation and administrative complaints incidental to its business. The Company does not believe that the resolution
of any or all of such current routine litigation and administrative complaints is likely to have a material adverse effect on the
Company’s financial condition or results of operations.
There are no proceedings
in which any of the directors, officers or affiliates of the Company, or any registered or beneficial holder of more than 5% of
the Company’s voting securities, is an adverse party or has a material interest adverse to that of the Company.
|
15.
|
Transactions
with Related Parties
|
Gadiyaram
Consulting Agreement
On October 5, 2017,
the Company entered into a consulting agreement (the “Consulting Agreement”) with Mr. Muralikrishna Gadiyaram (the
“Consultant”), a director of the Company, for a period of two years from the agreement date (the “Consulting
Term”). The Consulting Agreement formalized on a compensatory basis the arrangement that was in place for performance without
compensation by the Consultant of consulting services since the acquisition of Zone in November of 2016. Mr. Gadiyaram will continue
to provide guidance to the Company and Zone relating to the further development of their respective businesses and technologies.
In addition to the aforementioned services, if requested by the Company, Mr. Gadiyaram will provide guidance with respect to the
development of any businesses or technologies that the Company or Zone may acquire during the Consulting Term, including, but
not limited to, MoviePass. Pursuant to the Consulting Agreement, the Consultant will receive fees in the amount of $18,750 per
month in cash. Such fees have been accrued and paid by the Company since January 1, 2017. Following the execution of the Consulting
Agreement, the Company paid the consultant the accrued consulting fees for the period January 1, 2017 through November 30, 2017.
The amount payable to Mr. Gadiyaram as of March 31, 2018 was approximately $18,750.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
|
16.
|
Provision for
Income Taxes
|
The Company had a tax
provision for the three months ended March 31, 2018 and 2017 of $7,951 and $30,484, respectively. Tax for both the three months
ended March 31, 2018 and 2017 was comprised of minimum state taxes and a provision for tax within respect to taxes incurred by
the Company’s Indian subsidiary.
The Company’s
provision for income taxes for the three months ended March 31, 2018 and 2017 is based on the estimated annual effective tax rate
method prescribed by ASC 740-270, plus discrete items. The difference between the Company’s effective tax rates for the three
months ended March 31, 2018 and 2017 and the US statutory tax rates of 21% and 35%, respectively, primarily relates to changes
in the valuation allowances against deferred tax assets, non-deductible expenses, state income taxes (net of federal income tax
benefit), the effect of taxes on foreign earnings, and changes to provisional amounts recorded for certain aspects of the Act.
In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not that either some portion or the entire deferred
tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, tax-planning strategies, and available carry-back capacity in making
this assessment, therefore, the Company has recorded a valuation allowance on its net domestic deferred tax assets, excluding deferred
tax liabilities that are not expected to serve as a source of income for the recognition of deferred tax assets due to their indefinite
reversal period (tax amortization of goodwill).
As of March 31, 2018, the Company did not record any tax liabilities for uncertain income tax positions
and concluded that all of its tax positions are either certain or are not material to the Company’s financial statements.
The Company is currently not under audit in any jurisdiction in which it conducts business.
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 and Chief Financial
Officer. The Company operates in three segments, Consulting, Technology, and Subscription and Marketing and Promotional Services. During the three months ended March
31, 2018, the Company reported three segments.
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
The
Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes the
Company’s segment information for the following balance sheet dates presented, and for the three months ended March 31,
2018 and 2017:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
Consulting
|
|
|
|
|
|
|
Revenue
|
|
$
|
839,503
|
|
|
$
|
1,358,062
|
|
Cost of revenue
|
|
|
711,194
|
|
|
|
1,105,485
|
|
Gross profit
|
|
|
128,309
|
|
|
|
252,577
|
|
Total operating expenses
|
|
|
8,417,912
|
|
|
|
3,313,547
|
|
Loss from operations
|
|
|
(8,289,603
|
)
|
|
|
(3,060,970
|
)
|
Total other income/(expense)
|
|
|
81,710,691
|
|
|
|
(2,091,563
|
)
|
Provision for income taxes
|
|
|
4,176
|
|
|
|
(30,484
|
)
|
Total net income (loss)
|
|
$
|
73,425,264
|
|
|
$
|
(5,183,017
|
)
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
Gross profit
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
1,133,448
|
|
|
|
1,297,550
|
|
Loss from operations
|
|
|
(1,133,448
|
)
|
|
|
(1,297,550
|
)
|
Total other expense
|
|
|
(16,972
|
)
|
|
|
(16,988
|
)
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Total net loss
|
|
$
|
(1,150,420
|
)
|
|
$
|
(1,314,538
|
)
|
|
|
|
|
|
|
|
|
|
Subscription and Marketing and Promotional Services
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
48,603,357
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
135,257,782
|
|
|
|
-
|
|
Gross loss
|
|
|
(86,654,425
|
)
|
|
|
-
|
|
Total operating expenses
|
|
|
11,654,517
|
|
|
|
-
|
|
Loss from operations
|
|
|
(98,308,942
|
)
|
|
|
-
|
|
Total other income
|
|
|
-
|
|
|
|
-
|
|
Provision for income taxes
|
|
|
(12,127
|
)
|
|
|
-
|
|
Total net loss
|
|
$
|
(98,321,069
|
)
|
|
$
|
-
|
|
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
2018
|
|
|
December 31,
2017
|
|
Consulting
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,089,256
|
|
|
$
|
569,886
|
|
Accounts receivable
|
|
$
|
280,988
|
|
|
$
|
332,753
|
|
Prepaid expenses and other current assets
|
|
$
|
2,566,708
|
|
|
$
|
3,382,127
|
|
Property and equipment
|
|
$
|
159,918
|
|
|
$
|
96,464
|
|
Deposits and other assets
|
|
$
|
128,994
|
|
|
$
|
129,119
|
|
Accounts payable and accrued expenses
|
|
$
|
2,977,315
|
|
|
$
|
2,088,867
|
|
Liabilities to be settled in stock
|
|
$
|
9,957,166
|
|
|
$
|
20,875,045
|
|
Convertible notes payable
|
|
$
|
641,206
|
|
|
$
|
3,611,627
|
|
Warrant liability
|
|
$
|
70,030,200
|
|
|
$
|
67,288,800
|
|
Derivative liability
|
|
$
|
699,900
|
|
|
$
|
4,834,462
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,949,506
|
|
|
$
|
21,933,765
|
|
Prepaid expenses and other current assets
|
|
$
|
38,333
|
|
|
$
|
21,666
|
|
Property and equipment
|
|
$
|
91,512
|
|
|
$
|
95,301
|
|
Intangible assets, net
|
|
$
|
2,468,186
|
|
|
$
|
2,829,295
|
|
Deposits and other assets
|
|
$
|
10,052
|
|
|
$
|
10,052
|
|
Accounts payable and accrued expenses
|
|
$
|
396,035
|
|
|
$
|
607,622
|
|
Liabilities to be settled in stock
|
|
$
|
319,100
|
|
|
$
|
445,660
|
|
|
|
|
|
|
|
|
|
|
Subscription and Marketing and Promotional Services
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,481,756
|
|
|
$
|
2,445,742
|
|
Accounts receivable
|
|
$
|
24,151,228
|
|
|
$
|
27,137,466
|
|
Prepaid expenses and other current assets
|
|
$
|
662,286
|
|
|
$
|
154,018
|
|
Property and equipment
|
|
$
|
59,297
|
|
|
$
|
42,270
|
|
Intangible assets, net
|
|
$
|
24,811,525
|
|
|
$
|
25,707,487
|
|
Goodwill
|
|
$
|
79,137,177
|
|
|
$
|
79,137,177
|
|
Deposits and other assets
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
Accounts payable and accrued expenses
|
|
$
|
9,954,740
|
|
|
$
|
10,447,514
|
|
Deferred revenue
|
|
$
|
84,887,136
|
|
|
$
|
54,425,630
|
|
Asset
Purchase Agreement
On April 4, 2018, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”)
with Oath Inc. (formerly, AOL Inc.), a Delaware corporation and subsidiary of Verizon Communications (“Oath”), pursuant
to which the Company completed the acquisition from Oath of certain products, rights, technology, contracts, equipment, data and
other assets related to the “Moviefone” brand (the “Moviefone Assets”). The purchase price for the transaction
consisted of the following: (a) $1.0 million in cash, (b) the issuance of 2,550,154 shares of common stock of the Company, and
(c) the issuance of warrants to purchase 2,550,154 shares of common stock of the Company at an exercise price of $5.50 per share.
In addition, pursuant to the Purchase Agreement, the Company assumed certain specified liabilities related to the Moviefone Assets
for periods beginning on or after the acquisition date. The Purchase Agreement contains customary representations, warranties,
covenants, and indemnification provisions. In connection with the Purchase Agreement, the Company and Oath also entered into a
Lock-up Agreement, Registration Rights Agreement, Transition Services Agreement and Advertising Representative Agreement (the “Representative
Agreement”).
HELIOS AND MATHESON
ANALYTICS INC.
Notes
to Condensed Consolidated Financial Statements
Equity
Distribution Agreement
On April 18, 2018,
the Company entered into an Equity Distribution Agreement with Canaccord Genuity LLC under which the Company may offer and sell
shares of common stock having an aggregate offering price of up to $150,000,000 from time to time through Canaccord Genuity LLC,
acting as sales agent. The Company intends to use the net proceeds of the offering to increase the Company’s ownership stake
in MoviePass, a majority owned subsidiary of the Company, to support the operations of MoviePass or MoviePass Ventures, or to satisfy
a portion or all of any amounts payable in connection with the convertible notes issued on November 7, 2017 and January 23, 2018,
to the extent that they remain outstanding; and for general corporate purposes and transaction expenses. The proceeds may also
be used for acquisitions.
Underwriting
Agreement
On April 19, 2018, the
Company entered into an underwriting agreement with Canaccord Genuity LLC, on behalf of itself and as representative of the underwriters
named therein, pursuant to which the Company agreed to issue and sell to the Underwriters in a best-efforts underwritten public
offering (the “Offering”) of up to approximately $30.0 million in gross proceeds of securities of the Company including
(A) 10,500,000 Series A-2 units (the “Series A-2 Units”), with each Series A-2 Unit consisting of (i) one share of
the Company’s common stock and (ii) one Series A-2 warrant to purchase one share of common stock (the “Series A-2
Warrants”); and for those purchasers whose purchase of Series A-2 Units would result in the purchaser, together with its
affiliates and certain related parties, beneficially owning more than 9.99% of the Company’s outstanding common stock following
the consummation of the Offering, (B) 500,000 Series B-2 units (the “Series B-2 Units”, and together with the “Series
A-2 Units”, the “Units”), consisting of (i) one pre-funded Series B-2 warrant to purchase one share of common
stock (the “Series B-2 Warrants”, together with the Series A-2 Warrants, the “Warrants”) and (ii) one
Series A-2 Warrant. The Units were sold at a price to the public equal to $2.75 per Unit.
The Company received approximately
$27.5 million in net proceeds from the sale of the Units, after deducting underwriting discounts and commissions equal to $1,663,750
and estimated offering expenses of $1,050,000, assuming no exercise of the Warrants. Following the closing of the Offering, all
Series B-2 Warrants were exercised for an aggregate amount of $500.
New
Subscription Agreement with MoviePass
From February 27, 2018
through April 12, 2018, the Company advanced a total of $35,000,000 to MoviePass (the “Second Advance”). On April
16, 2018, the Company entered into an additional Subscription Agreement with MoviePass (the “April 2018 Agreement”),
pursuant to which, in lieu of repayment of the Second Advance, MoviePass agreed to sell to the Company an amount of shares of
common stock of MoviePass equal to 10.6% of the total then outstanding MoviePass Common Stock (excluding shares underlying MoviePass
options and warrants) (the “April 2018 MoviePass Purchased Shares”), based on a pre-money valuation of MoviePass of
$295,525,000 as of March 31, 2018. Pursuant to the April 2018 Agreement, MoviePass also agreed to issue to the Company, in addition
to the April 2018 MoviePass Purchased Shares, without payment of additional consideration by the Company, for purposes of anti-dilution,
an amount of shares of common stock of MoviePass that caused the Company’s total ownership of the outstanding shares of
common stock of MoviePass (excluding shares underlying MoviePass options and warrants), together with the April 2018 MoviePass
Purchased Shares, to equal 91.8% as of April 12, 2018.
MoviePass Ventures
MoviePass Ventures aims
to collaborate with film distributors to share in film revenues while using the data analytics MoviePass offers for marketing
and targeting services reaching MoviePass’ paying subscribers using the platform. In April 2018, MoviePass Ventures entered
into an Acquisition Co-Financing and Distribution Agreement with Orchard Enterprises NY, Inc. for the purpose of co-funding the
acquisition, advertising and promotion of MoviePass Ventures’ first film, titled “American Animals,” which premiered
at the 2018 Sundance Film Festival. In April 2018, MoviePass Ventures also entered into a Finance and Marketing Agreement with
Georgia Film Fund 46, LLC (“GFF”) and Emmett Furla Oasis Films, LLC, a First Amendment to Amended and Restated Production
Financing Agreement with GFF and Ronin Private Investments, LLC, and a First Amendment to Term Sheet with GFF and River Bay Films,
LLC, for the purpose of co-financing and co-marketing the film titled “Gotti,” directed by Kevin Connolly and starring
John Travolta, which will premiere at the 2018 Cannes Film Festival on May 15, 2018.
Share
Issuances Pursuant to Equity Distribution Agreement and November 2017 Investor Notes
Beginning May 10,
2018 and through May 14, 2018, the Company has issued shares of common stock pursuant to its Equity Distribution Agreement with
Canaccord Genuity LLC, and its November 2017 convertible notes following receipt of prepayments under the corresponding November
2017 investor notes. Accordingly, during the period from May 10, 2018 through May 14, 2018, the Company has issued approximately
18 million shares of its common stock and received gross cash proceeds of approximately $15.4 million with respect to common stock
issued pursuant to the Equity Distribution Agreement. In addition, during the same period the Company received gross proceeds
of approximately $5.9 million with respect to funding of the November 2017 investor notes and issued approximately 8.0 million
shares with respect to the conversion of such funded notes, including 2.4 million shares related to the make whole interest provisions
of such notes