Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. General
The accompanying unaudited interim condensed consolidated financial statements (“interim statements”) of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), issued by the SEC. Accordingly, they do not include all the information and footnotes required by 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, 2016 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2016. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2016.
2. Prior Year Reclassification
Certain prior year amounts have been reclassified for consistency with the current period presentation. This reclassification had no impact on the Company’s previously reported income from operations or cash flows from operations; the Company has determined that the impact of this reclassification is not material to the previously issued annual and interim unaudited consolidated financial statements using the guidance of SEC Staff Accounting Bulletin ("SAB”) No. 99 and SAB 108.
3. Change in Controlled Company Status
Prior to the merger between our wholly-owned subsidiary, Zone Acquisition, Inc. (“Zone Acquisition”), and Zone Technologies, Inc. (“Zone”), as described below, the Company was a controlled company as defined by Rule 5615(c)(1) of the NASDAQ Listing Rules because Helios and Matheson Information Technology Ltd., our former parent (referred to in this report as “HMIT”), was the beneficial owner of approximately 75% of our outstanding common stock. Upon consummation of the merger on November 9, 2016, we ceased to be a controlled company.
4. Merger with Zone Technologies, Inc.
On November 9, 2016 (the “Closing Date”), the Company completed the merger contemplated by the previously disclosed Agreement and Plan of Merger, dated as of July 7, 2016, among us, Zone and Zone Acquisition, as amended by the Waiver and First Amendment to Agreement and Plan of Merger dated as of August 25, 2016 and the Acknowledgment of Satisfaction of Condition and Second Amendment to Agreement and Plan of Merger, dated as of September 21, 2016 (collectively, the “Merger Agreement”).
On the Closing Date, the Company issued 1,740,000 shares of our common stock as merger consideration pursuant to the Merger Agreement, which represented an exchange ratio of 0.174 shares of our common stock for each share of Zone common stock outstanding, and Zone Acquisition, our wholly-owned subsidiary, was merged into Zone, with Zone surviving the merger as our wholly-owned subsidiary.
Zone is the developer of the proprietary RedZone Map, a GPS-driven, real-time crime and navigation map application whose goal is to enhance personal safety worldwide by providing users with real time crime data and a platform for alerting other users to criminal and other safety related occurrences in a navigation map format. Zone’s mapping lets users be pro-active when traveling, allowing them to enter a number of different cautionary items such as traffic problems, police sightings, road hazards, accidents and road closures. It also allows users to report a crime and to video upload live incidents.
Zone’s business model has four components. The first component is providing user access to public safety information. Zone’s goal is to enhance the personal safety of its users by providing crime data to anyone using a mobile or stationary mapping application for navigation. Zone also provides tools for examining such things as neighborhoods for possible relocation, schools to attend, travel planning and lodging selection. The second component, when implemented, will provide enterprise business solutions, such as choosing a route for trucking and delivery services based on crime mapping analytics. The third component, when implemented, will be geared towards providing law enforcement agencies with tools to better understand crime patterns and to engage with their jurisdiction(s) more meaningfully. The fourth component, when implemented, will be to work with governmental agencies using advanced mapping and geo-fencing for counter-terrorism efforts.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
While RedZone Map is a fully functioning app available for free in the Apple App Store and the Google Play Store, the Company has not yet derived any advertising revenues from the app.
The following tables summarize the fair values of the net assets/liabilities assumed and the allocation of the aggregate fair value of the purchase consideration, non–controlling interest and net liabilities to assumed identifiable and unidentifiable intangible assets:
Purchase consideration:
|
|
|
|
|
Common stock (1,740,000 shares at the transaction date fair value of $5.41 per share)
|
|
$
|
9,413,000
|
|
Liabilities assumed
|
|
|
1,574,512
|
|
Assets acquired
|
|
|
(136,343
|
)
|
Aggregate fair value of enterprise
|
|
|
10,851,169
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Net liabilities assumed
|
|
|
(1,488,476
|
)
|
Cash acquired
|
|
|
136,343
|
|
Total
|
|
|
(1,352,133
|
)
|
|
|
|
|
|
Technology
|
|
|
4,270,000
|
|
Broker Relationships
|
|
|
4,200
|
|
Trademarks
|
|
|
1,977,000
|
|
Goodwill
|
|
|
4,599,969
|
|
Total purchase price allocation
|
|
$
|
10,851,169
|
|
5. Going Concern Analysis
The Company is subject to a number of risks similar to those of other Big Data technology and technology consulting companies, including its dependence on key individuals, uncertainty of product development and generation of revenues, dependence on outside sources of capital, risks associated with research, development, testing, and successful protection of intellectual property, and the Company’s susceptibility to infringement on the proprietary rights of others and, ultimately, the attainment of profitable operations are dependent on future events, including obtaining adequate financing to fulfill its development 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, and as at March 31, 2017, had an accumulated deficit of $49,758,973, a net loss for the three months ended March 31, 2017 of $6,497,555 and net cash used in operating activities of $2,492,785.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Company expects to continue to incur net losses and have significant cash outflows for at least the next twelve months. As of March 31, 2017, the Company had cash and a working capital deficit of $3,235,423 and $307,411, respectively and during the three months ended March 31, 2017, the Company used cash from operations of $2,492,785.
Management has concluded that due to the conditions described above, there is substantial doubt about the Company’s ability to continue as a going concern through one year after the issuance of the accompanying financial statements. Management has evaluated the significance of the conditions 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 of the condensed consolidated financial statements were issued. While management continues to plan on raising additional capital from investors to meet operating cash requirements, there is no assurance that management’s plans will be successful.
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.
6. Summary of Significant Accounting Policies
Basis of Presentation
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Principles of Consolidation
All intercompany transactions and balances have been eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of acquisition to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at amounts due from clients, net of an allowance for doubtful accounts. The Company monitors its accounts receivable balances on a monthly basis to ensure that they are collectible. On a quarterly basis, the Company uses its historical experience to estimate its accounts receivable reserve. The Company’s allowance for doubtful accounts is an estimate based on specifically identified accounts as well as general reserves. The Company evaluates specific accounts where it has information that the client may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the best available facts and circumstances, and records a specific reserve for that client against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. The Company also establishes a general reserve for all clients based on a range of percentages applied to aging categories. These percentages are based on historical collection and write-off experience. If circumstances change, the Company’s estimate of the recoverability of amounts due the Company could be reduced or increased by a material amount. Such a change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Carrying Value, Recoverability and Impairment of Long-Lived Assets
The Company has adopted Section 360-10-35 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for its long-lived assets. Pursuant to ASC Paragraph 360-10-35-17, an impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. Pursuant to ASC Paragraph 360-10-35-20, if an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets which range from three to ten years.
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the consolidated statements of operations.
During the three months ended March 31, 2017 and 2016, the Company recorded depreciation expense of $4,274 and $3,314, respectively.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the assets acquired and liabilities assumed. The Company is required to perform impairment reviews at each of its reporting units annually and more frequently in certain circumstances. The Company performs the annual assessment on December 31.
In accordance with ASC 350–20 “
Goodwill
”, the Company is able to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the two–step goodwill impairment test. If the Company concludes that it is more likely than not that the fair value of a reporting unit is not less than its carrying amount it is not required to perform the two–step impairment test for that reporting unit.
There were no impairment charges recognized during the three months ended March 31, 2017 and 2016.
Intangible Assets, net
Intangible assets consist of technology, trademarks and broker relationships. Applicable long-lived assets are amortized or depreciated over the shorter of their estimated useful lives, the estimated period that the assets will generate revenue, or the statutory or contractual term in the case of patents. Estimates of useful lives and periods of expected revenue generation are reviewed periodically for appropriateness and are based upon management’s judgment. Intangible assets are amortized on the straight-line method over their useful lives ranging from 1 to 7 years.
During the three months ended March 31, 2017 and 2016, the Company recorded amortization expense of $426,651 and $0, respectively.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Debt Discount and Debt Issuance Costs
Debt discounts and debt issuance costs incurred in connection with the issuance of debt are capitalized and amortized to interest expense based on the related debt agreements using the effective-interest method.
Derivative Instruments
The Company evaluates its convertible notes and warrants to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC Paragraph 815-10-05-4 and ASC and Paragraph 815-40-25. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current to correspond with its host instrument.
The Company marks to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the change in the fair value of the remaining embedded derivative warrants as other income or expense in the statements of operations.
The Company utilizes the Monte Carlo Method that values the liability of the debt conversion feature derivative financial instruments and derivative warrants based on a probability of a down round event. The reason the Company selected the lattice binomial model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models.
Revenue Recognition
Consulting revenues are recognized as services are provided. The Company primarily provides consulting services under time and material contracts, whereby revenue is recognized as hours and costs are incurred. Clients for consulting revenues are billed on a weekly or monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs. Any anticipated contract losses are estimated and accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based on services performed in advance of customer billings. Revenue from sales of software licenses is recognized upon delivery of the software to a customer because future obligations associated with such revenue are insignificant.
Advertising
The Company expenses advertising costs when incurred.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Comprehensive Loss
Comprehensive loss consists of two components, net loss and other comprehensive loss. Other comprehensive loss refers to revenue, expenses, gains and losses that are recorded as an element of stockholder’s equity but are excluded from net loss. The Company’s other comprehensive loss is comprised of foreign currency translation adjustments.
Foreign Currency Translation
Assets, liabilities, revenue and expenses denominated in non-U.S. currencies are translated at the rate of exchange prevailing on the date of the consolidated balance sheet. Gains (losses) on translation of the consolidated financial statements are from the Company’s subsidiary where the functional currency is not the U.S. dollar. Translation gains (losses) are reflected as a component of accumulated other comprehensive income (loss). Gains (losses) on foreign currency transactions are included in the consolidated statements of income.
Income Taxes
Income taxes are provided in accordance with ASC No. 740, “
Accounting for Income Taxes
”. A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting and net operating loss carryforwards. Deferred tax expense (benefit) results from the net change during the period of deferred tax assets and liabilities.
Stock Based Compensation
The Company uses the fair value method as specified by the FASB, whereby compensation cost is recognized over the remaining service period based on the grant-date fair value of those awards as calculated for pro forma disclosures as originally issued.
Net Income/(Loss) Per Share
Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
The following table sets forth the computation of basic and diluted net income/(loss) per share for the three months ended March 31, 2017 and 2016:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders - basic
|
|
$
|
(6,497,555
|
)
|
|
$
|
(150,414
|
)
|
Effect of dilutive instrument on net income (loss)
|
|
|
-
|
|
|
|
-
|
|
Net loss attributable to common shareholders - diluted
|
|
$
|
(6,497,555
|
)
|
|
$
|
(150,414
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock outstanding - basic
|
|
|
5,530,083
|
|
|
|
2,330,438
|
|
Dilutive effect of stock options, warrants and convertible securities
|
|
|
-
|
|
|
|
-
|
|
Weighted average shares of common stock outstanding - diluted
|
|
|
5,530,083
|
|
|
|
2,330,438
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
Basic & Diluted
|
|
$
|
(1.17
|
)
|
|
$
|
(0.06
|
)
|
The following table shows the outstanding dilutive common shares excluded from the diluted net loss per share calculation as they were anti-dilutive:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Warrants
|
|
$
|
130,714
|
|
|
$
|
70,714
|
|
Conversion features on convertible notes
|
|
|
216,092
|
|
|
|
511,989
|
|
Total potentially dilutive shares
|
|
$
|
346,806
|
|
|
$
|
582,703
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Recent Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. The standard’s core principle (issued as ASU 2014-09 by the FASB), is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of ASU 2014-09 by one year, and would allow entities the option to early adopt the new revenue standard as of the original effective date. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating this standards impact on its consolidated financial statements and disclosures.
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.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
which supersedes FASB ASC Topic 840,
Leases (Topic 840)
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 March 2016, the FASB issued ASU No. 2016-06,
“Contingent Put and Call Option in Debt Instruments”
(“ASU 2016-06”). ASU 2016-06 is intended to simplify the analysis of embedded derivatives for debt instruments that contain contingent put or call options. The amendments in ASU 2016-06 clarify that an entity is required to assess the embedded call or put options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to initially assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 take effect for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. As of March 31, 2017, the Company has adopted ASU 2016–06 and has determined that the impact over the results of operations and cash flows is not material.
In April 2016, the FASB issued ASU No. 2016-09, “
Compensation – Stock Compensation (Topic 718)”
. The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption of the update is permitted. As of March 31, 2017, the Company has adopted ASU 2016–06 and has determined that the impact over the results of operations and cash flows is not material.
In May 2016, the FASB issued ASU 2016-12,
“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”
(“ASU 2016-12”). The amendments in ASU 2016-12 provide clarifying guidance in certain narrow areas and add some practical expedients. Specifically, the amendments in this update (1) clarify the objective of the collectability criterion in step 1, and provides additional clarification for when to recognize revenue for a contract that fails step 1, (2) permit an entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price (3) specify that the measurement date for noncash consideration is contract inception, and clarifies that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration, (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations, (5) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application. Further, accounting for elements of a contract that do not affect revenue under legacy GAAP are irrelevant to the assessment of whether a contract is complete. In addition, the amendments permit an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts, and (6) clarifies that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. However, an entity is still required to disclose the effect of the changes on any prior periods retrospectively adjusted. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company beginning January 1, 2018, although early adoption is permitted beginning January 1, 2017. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-12 on its results of operations, cash flows and financial position.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
In October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”,
which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230)”
, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently in the process of evaluating the impact of ASU 2016-18 on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01
Business Combinations (Topic 805): Clarifying the Definition of a Business
in an effort to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
to simplify the accounting for goodwill impairment. The guidance removes the second step of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill for all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. This guidance is effective in 2020, but early adoption is permitted for any impairment tests performed after January 1, 2017. The Company is currently evaluating the impact that this guidance will have on the Company’s consolidated financial statements.
7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following at March 31, 2017 and December 31, 2016:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Customer Deposits
|
|
$
|
314,627
|
|
|
$
|
300,199
|
|
Tax
|
|
|
173,637
|
|
|
|
187,776
|
|
Insurance
|
|
|
74,345
|
|
|
|
44,517
|
|
Professional Fees and Services
|
|
|
157,600
|
|
|
|
42,833
|
|
Rent
|
|
|
13,087
|
|
|
|
13,087
|
|
Other
|
|
|
61,376
|
|
|
|
8,759
|
|
Total prepaid expenses and other current assets
|
|
$
|
794,672
|
|
|
$
|
597,171
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
8. Property and Equipment, net
Property and equipment, net on March 31, 2017 and December 31, 2016 are as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Equipment and leaseholds
|
|
$
|
97,689
|
|
|
$
|
106,460
|
|
Furniture and Fixtures
|
|
|
52,924
|
|
|
|
34,186
|
|
Software
|
|
|
177,225
|
|
|
|
167,337
|
|
Subtotal
|
|
|
327,838
|
|
|
|
307,983
|
|
Less: Accumulated depreciation
|
|
|
267,047
|
|
|
|
262,771
|
|
Property and Equipment, net
|
|
$
|
60,791
|
|
|
$
|
45,212
|
|
9. Intangible Assets, net and Goodwill
The Company’s intangibles assets consisted of the following on March 31, 2017 and December 31, 2016
:
|
|
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
Estimated
Useful Life
|
|
|
Net Book Value
|
|
|
Net Book Value
|
|
Technology
|
|
|
3
|
|
|
$
|
4,270,000
|
|
|
$
|
4,270,000
|
|
Trademarks
|
|
|
7
|
|
|
|
1,977,000
|
|
|
|
1,977,000
|
|
Broker Relationships
|
|
|
1
|
|
|
|
4,200
|
|
|
|
4,200
|
|
Subtotal
|
|
|
|
|
|
|
6,251,200
|
|
|
|
6,251,200
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(673,160
|
)
|
|
|
(246,509
|
)
|
Intangible assets, net
|
|
|
|
|
|
$
|
5,578,040
|
|
|
$
|
6,004,691
|
|
The Company recorded amortization expense of $426,651 and $0 for the three months ended March 31, 2017 and 2016, respectively.
The following table outlines estimated future annual amortization expense for the next five years and thereafter:
March 31,
|
|
|
|
|
Remaining 2017
|
|
$
|
1,279,951
|
|
2018
|
|
|
1,706,602
|
|
2019
|
|
|
1,501,009
|
|
2020
|
|
|
283,269
|
|
2021
|
|
|
283,147
|
|
Thereafter
|
|
|
524,062
|
|
Total
|
|
$
|
5,578,040
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Goodwill and indefinite lived intangible assets are tested for impairment annually as of December 31
st
and more often if a triggering event occurs, by comparing the fair value of each reporting unit to its carrying value.
Balance as of December 31, 2016
|
|
$
|
4,599,969
|
|
Goodwill activity for three months ended March 31, 2017
|
|
|
-
|
|
Balance as of March 31, 2017
|
|
$
|
4,599,969
|
|
10. Securities Purchase Agreement
The Notes
On September 7, 2016 the Company issued Senior Secured Convertible Notes (“September Notes”) in the aggregate principal amount of $4,301,075 for consideration consisting of (i) a cash payment by an institutional investor (the “Investor”) in the amount of $1,000,000 together with a secured promissory note payable by the Investor to the Company (the “Investor Note”) in the principal amount of $3,000,000 to finance a portion of the purchase price, fees and expenses for the direct or indirect acquisition of Zone Technologies, Inc. The September Notes have a maturity date of December 7, 2017. As of March 31, 2017, the Investor has made the following prepayments of the Investor Note: $1,000,000 on October 25, 2016; $1,100,000 on November 16, 2016; and $900,000 on December 2, 2016. As of January 23, 2017, the Investor had accepted a total of 887,707 shares of the Company’s common stock in full payment of the September Notes. 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, 2017, the Company had interest expense of $1,217 related to the final $332,000 in principal amount outstanding during the quarter.
On December 2, 2016, the Company issued two Senior Secured Convertible Notes (the “December Notes”) to the Investor in the aggregate principal amount of $6,720,000 for consideration consisting of (i) a cash payment by the Investor in the amount of $1,100,000 and (ii) a secured promissory note payable by the Investor to the Company (the “December Investor Note”) in the principal amount of $4,900,000 to aid in the funding of Zone Technologies, Inc prior to the entity’s ability to generate revenues. The December Notes have a maturity date of August 2, 2017. At any time, the Investor may and, so long as certain equity conditions are met, the Company may require the Investor to (a “Mandatory Conversion”), convert the December Notes into shares of the Company’s common stock. At March 31, 2017, the contracted conversion price was $4.00 for a conversion made at the election of the Investor and, for a Mandatory Conversion, the Mandatory Conversion Price. The Mandatory Conversion Price is defined as that price which is the lower of (i) the applicable Conversion Price as in effect on the applicable Mandatory Conversion date, and (ii) 80% the sum of (A) the VWAP of the common stock for each of the 3 trading days with the lowest VWAP of the common stock during the 20 consecutive trading day period ending on and including the trading day immediately prior to the applicable Mandatory Conversion date by and (B) three. As of March 31, 2017 the Investor had paid $3,000,000 of the December Investor Note with the balance payable in full to the Company on August 2, 2017. 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, 2017, the Company had $84,293 of interest expense pertaining to the unpaid principal amount of the December Notes.
On February 8, 2017, the Company issued two Senior Secured Convertible Notes (the “February 2017 Notes”) to the Investor in the aggregate principal amount of $5,681,818 for consideration consisting of a secured promissory note payable by the Investor to the Company (the “February 2017 Investor Note”) in the principal amount of $5,000,000 to aid in the funding of Zone Technologies, Inc prior to the entity’s ability to generate revenues. The February 2017 Notes have a maturity date of October 8, 2017. At any time the Investor may and, so long as certain equity conditions are met, the Company may require the Investor to (a “Mandatory Conversion”), convert the February Notes into shares of the Company’s common stock. At March 31, 2017, the contracted conversion price was $4.00 for a conversion made at the election of the Investor and, for a Mandatory Conversion, the Mandatory Conversion Price. The Mandatory Conversion Price is defined as that price which is the lower of (i) the applicable Conversion Price as in effect on the applicable Mandatory Conversion date, and (ii) 80% the sum of (A) the VWAP of the common stock for each of the 3 trading days with the lowest VWAP of the common stock during the 20 consecutive trading day period ending on and including the trading day immediately prior to the applicable Mandatory Conversion date by and (B) three. As of March 31, 2017 the Investor had paid $0 of the February 2017 Investor Note with the amount payable in full to the Company on October 8, 2017. 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, 2017, the Company had $10,277 of interest expense pertaining to the unpaid principal amount of the February 2017 Notes.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The Placement Notes and Warrants
The Company entered into an agreement with a placement agent (the “Placement Agent”) for assistance with the placement of the September Notes. The Placement Agent accepted from the Company a Senior Secured Convertible Note (the “September Placement Note”) in the aggregate amount of $80,000 in partial payment of the Placement Agent’s fee. Unless earlier converted or redeemed, the September Placement Note matures 15 months from the date of issuance. The Placement Agent Note bears interest at a rate of 6% due quarterly and calculated on a 360 day basis. For the three months ended March 31, 2017, the Company had interest expense pertaining to the September Placement Note in the amount of $1,200. The Placement Agent also received a 5-year warrant (the “Placement Agent Warrant”) for the purchase of the Company’s common stock as partial payment for the Placement Agent’s services. The Placement Agent Warrant is issued in tranches in conjunction with cash payments received by the Company on the corresponding Investor Note. During 2016, warrants were earned allowing for the purchase of 48,714 shares of the Company’s common stock at exercise prices ranging from $4.54 per share to $9.36 per share. As of March 31, 2017 and December 31, 2016 the Placement Agent had not purchased any shares from the exercise of the Placement Agent Warrant.
The Company entered into an agreement with the Placement Agent for assistance with the placement of the December Notes. The Placement Agent accepted from the Company a 5-year warrant (the “December Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The December Placement Agent Warrant is issued in tranches in conjunction with cash payments received by the Company on the corresponding December Investor Note. As of December 31, 2016, 22,000 shares of the Company’s common stock had been issued in conjunction with the December Placement Agent Warrants at an exercise price of $4.45 per share. On February 8, 2017, the Company received a $3 million cash payment on the December Investor Notes, resulting in the issuance of 60,000 warrants at an exercise price of $4.00 per share. As of March 31, 2017 and December 31, 2016 the Placement Agent had not purchased any shares from the exercise of the December Placement Agent Warrant.
The Company entered into an agreement with the Placement Agent for assistance with the placement of the February Notes. The Placement Agent accepted from the Company a 5-year warrant (the “February Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The February Placement Agent Warrant allows the purchase of up to 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the February Note in the principal amount of $5 million becomes convertible at an exercise price of $4.50 per share. As of March 31, 2017 and December 31, 2016 the Placement Agent had not purchased any shares from the exercise of the February Placement Agent Warrants.
Note Activity:
Senior Secured Convertible Notes consists of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
September notes
|
|
$
|
-
|
|
|
$
|
20,480
|
|
September placement note
|
|
|
36,000
|
|
|
|
902
|
|
December notes
|
|
|
2,168,960
|
|
|
|
10,043
|
|
February notes
|
|
|
146,102
|
|
|
|
-
|
|
Balance at March 31, 2017
|
|
$
|
2,351,062
|
|
|
$
|
31,425
|
|
Under ASC 210-20-45-1, management offset the Notes by the Investor Notes yet to be funded.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The carrying value of the Senior Secured Convertible Notes is comprised of the following:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
September notes
|
|
$
|
-
|
|
|
$
|
332,000
|
|
September placement note
|
|
|
80,000
|
|
|
|
80,000
|
|
December notes
|
|
|
3,295,000
|
|
|
|
1,820,000
|
|
February notes
|
|
|
681,818
|
|
|
|
-
|
|
Unamortized discounts
|
|
|
(1,705,756
|
)
|
|
|
(2,200,575
|
)
|
|
|
$
|
2,351,062
|
|
|
$
|
31,425
|
|
During the three months ended March 31, 2017, the Investor has converted a total of $1,848,692 in principal and $8,309 in interest into 466,352 shares of the Company’s common stock.
Subsequent to March 31, 2017, the Company has not received any additional proceeds from the December Investor Note.
11. Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis
Level 3 Financial Liabilities - Derivative conversion features and warrant liabilities
Financial liabilities measured at fair value on a recurring basis are summarized below and disclosed on the consolidated balance sheet as of March 31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Amount at Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - warrants
|
|
$
|
312,432
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
312,432
|
|
Derivative liability – conversion feature
|
|
|
403,743
|
|
|
|
-
|
|
|
|
-
|
|
|
|
403,743
|
|
Total
|
|
$
|
716,175
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
716,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - warrants
|
|
$
|
230,663
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
230,663
|
|
Derivative liability – conversion feature
|
|
|
977,129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
977,129
|
|
Total
|
|
$
|
1,207,792
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,207,792
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the month ended March 31, 2017:
|
|
Fair Value Measurement
Using Level 3
Inputs Total
|
|
Balance at December 31, 2016
|
|
$
|
1,207,792
|
|
Purchases, issuances and settlements
|
|
|
1,372,913
|
|
Reclassification to paid in capital
|
|
|
(882,199
|
)
|
Change in fair value of derivative liabilities
|
|
|
(982,331
|
)
|
Balance at March 31, 2017
|
|
$
|
716,175
|
|
The fair value of the derivative conversion features and warrant liabilities as of March 31, 2017 and December 31, 2016 were calculated using a Monte-Carlo option model valued with the following weighted average assumptions:
|
|
March 31,
Amount
|
|
|
December 31,
Amount
|
|
Dividend Yield
|
|
|
|
0%
|
|
|
|
|
|
0%
|
|
|
Expected Volatility
|
|
|
100%
|
-
|
140%
|
|
|
|
154%
|
-
|
230%
|
|
Risk free interest rate
|
|
|
0.81%
|
-
|
1.93%
|
|
|
|
0.82%
|
-
|
1.12%
|
|
Contractual term (in years)
|
|
|
0.34
|
-
|
4.68
|
|
|
|
0.67
|
-
|
5.0
|
|
Exercise price
|
|
|
$4.00
|
-
|
$9.36
|
|
|
|
$4.00
|
-
|
$9.36
|
|
Changes in the observable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood would result in a higher (lower) fair value measurement.
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 terminated the Company’s 1997 Stock Option and Award Plan and approved and adopted the Helios and Matheson Analytics Inc. 2014 Equity Incentive Plan (the “2014 Plan”) which the Company’s stockholders approved at the annual stockholders meeting on May 5, 2014. There were 520,000 shares outstanding under the 1997 Stock Option and Award Plan. The 2014 Plan originally set aside and reserved 400,000 shares of the Company’s common stock for grant and issuance in accordance with its terms and conditions. Persons eligible to receive awards from the 2014 Plan include employees (including officers and directors) of the Company and its affiliates, consultants who provide significant services to the Company or its affiliates, and directors who are not employees of the Company or its affiliates (the “Participants”). The 2014 Plan permits the Company to issue to Participants qualified and/or non-qualified options to purchase the Company’s common stock, restricted common stock, performance units, and performance shares. The 2014 Plan will terminate on March 3, 2024. The Company’s Board of Directors is responsible for administration of the 2014 Plan and has the sole discretion to determine which Participants will be granted awards and the terms and conditions of the awards granted. Effective November 7, 2016 the plan was amended to include a total of 1,125,000 shares of common stock to be issued under the Employee Stock Option Plan.
Also, through the date of filing this Form 10-Q, several awards have been granted outside of the 2014 Plan to multiple third party consultants in exchange for services rendered in the amount of $1,896,400, which is recorded as part of Selling, General and Administrative expenses on the Company’s Statements of Operations for the three months ended March 31, 2017.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
13. Concentration of Credit Risk
As of March 31, 2017, and December 31, 2016, 4 customers accounted for 73% and 70% of the Company’s total accounts receivable, respectively.
During the three months ended March 31, 2017 and 2016, 87%, and 94% of the Company’s revenues were earned from 4 customers and 4 customers, respectively.
As of March 31, 2017 and December 31, 2016, 4 vendors accounted for 85% and 2 vendors accounted for 94% of the Company’s accounts payable, respectively.
14. Commitments and Contingencies
The Company’s commitments at March 31, 2017 are comprised of the following:
Operating Lease Commitments
(1)
|
|
Payments due by
period
|
|
Less than 1 year
|
|
$
|
129,892
|
|
1 to 3 years
|
|
|
677,895
|
|
3 to 5 years
|
|
|
347,985
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
1,155,772
|
|
(1)
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 3
rd
Floor, Beta Block, Number 7 Sigma Tech Park, Varthur Kodi, Bangalore 560066. This lease will expire on October 7 2017,
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. Rent expense for the three months ended March 31, 2017 and 2016 was approximately $47,800 and $90,900, respectively.
As of March 31, 2017, the Company does not have any “Off Balance Sheet Arrangements”.
Legal Proceeding:
On August 24, 2016, 3839 Holdings LLC (“3839 Holdings”) filed a summons and complaint in the Supreme Court of the State of New York, New York County, against Theodore Farnsworth (“Mr. Farnsworth”), Highland Holdings Group, Inc. (“HHGI”) and Zone Technologies, Inc. (“Zone”), collectively referred to as the “Zone Defendants”. The claims arise out of 3839 Holdings’ purchase of a 10% interest in HHGI and an unsuccessful real estate investment. The Complaint asserted claims for: (i) breach of contract, breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty against Mr. Farnsworth and HHGI; (ii) unjust enrichment against Mr. Farnsworth and Zone; (iii) fraudulent conveyance against all of the Zone Defendants; and (iv) alter ego liability against Mr. Farnsworth for HHGI’s obligations. The suit also sought, as part of any final relief it may obtain after trial, an injunction against the merger between Zone and the Company, along with an award of attorneys’ fees. On or about December 7, 2016, 3839 Holdings amended the complaint to add the Company as a defendant, alleging claims against the Company for unjust enrichment, fraudulent conveyance, aiding and abetting a fraudulent conveyance, tortious interference with contract, permanent injunction and attorneys’ fees and cost. 3839 Holdings seeks compensation from the Company and the Zone Defendants in an amount of no less than $3 million plus prejudgment interest, attorney’s fees and costs and expenses. 3839 Holdings is also seeking an injunction to prevent the Company and the Zone Defendants from transferring or disposing of assets. The Company and Zone believe that the claims are baseless and intend to vigorously defend the action.
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
15. Transactions with Related Parties
Transactions with Helios and Matheson Information Technology Ltd. (“HMIT”)
In September 2010 the Company entered into an amendment of a Memorandum of Understanding (the “MOU”) with its former parent, HMIT, which was subsequently amended on August 2013. Pursuant to the MOU, HMIT agreed to make available to the Company facilities of dedicated Off-shore Development Centers (“ODCs”) and also render services by way of support in technology, client engagement, management and operating the ODCs for the Company. The Company furnished HMIT with a security deposit of $2 million to cover any expenses, claims or damages that HMIT may have incurred while discharging its obligations under the MOU and also to cover the Company’s payable to HMIT. As of December 31, 2015, the Company had a receivable from HMIT in the amount of $182,626 which represents amounts paid on behalf of HMIT, for which the Company fully reserved.
In August 2014, the Company entered into a Professional Service Agreement with HMIT (the “PSA”), which documented ongoing services provided by HMIT from February 24, 2014. Pursuant to the PSA, HMIT hired employees in India and provided infrastructure services for those employees to facilitate the operations of those of the Company’s clients who needed offshore support for their businesses. For the services the Company paid the costs incurred by HMIT for the employees it hired to provide the services and a fixed fee for infrastructure support. Beginning October 2014, all employees were transferred to the payroll of the Company’s subsidiary, Helios and Matheson Global Services Pvt. Ltd., and HMIT was paid only for the infrastructure support it provided until August 2015. Beginning September 2015, Helios and Matheson Global Services Pvt. Ltd. leased an office and took over infrastructure support from HMIT. For the three months ended March 31, 2017 and 2016 the Company did not have any revenue from services provided with offshore support of HMIT.
HMIT ceased providing services under the MOU and PSA during the third quarter of 2015. The Company ensured continued uninterrupted services to its clients by taking on infrastructure costs relating to the lease and employees.
The Company determined to provide for a reserve in its September 30, 2015 and December 31, 2015 financial statements in the amount of $2.3 million (the “Reserve Amount”) due to an uncertainty relating to the ability of HMIT to (i) return the security deposit held by HMIT in connection with the MOU and (ii) pay approximately $344,000 in reimbursable expenses and advances pursuant to the PSA.
On January 21, 2016, HMIT became subject to a liquidation order by an Indian court resulting from creditors’ claims against HMIT. On February 15, 2016, the High Court of Judicature at Madras (Civil Appellate Jurisdiction) issued an order of interim stay of the liquidation order. HMIT continues to await a decision from the High Court of Judicature relating to this matter. If HMIT becomes subject to liquidation, the Company would likely not be able to collect the full amount of $2.3 million reserved in its September 30, 2016 and December 31, 2016 financial statements.
Maruthi Consulting Inc. (Subsidiary of HMIT)
The Company provided consulting services to Maruthi Consulting Inc., a subsidiary of HMIT. As of January 1, 2015, we had a receivable due from Maruthi in the amount of $75,338 and during 2015 we billed an additional $223,454 to Maruthi for services rendered. We provided no services to Maruthi during the year ended December 31, 2016. During 2015, we received $237,318 in payments from Maruthi. Therefore, the amounts receivable at March 31, 2017 and December 31, 2016 was approximately $61,474 and $61,474, respectively.
16. Warrants
The following is a summary of the Company’s stock warrant activity during the three months March 31, 2017:
|
|
Warrant
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
Outstanding/Exercisable – December 31, 2016
|
|
|
70,714
|
|
|
$
|
6.26
|
|
|
|
4.87
|
|
Granted
|
|
|
60,000
|
|
|
|
8.08
|
|
|
|
4.99
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding/Exercisable – March 31, 2017
|
|
|
130,714
|
|
|
$
|
7.09
|
|
|
|
4.85
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
17. Provision for Income Taxes
The provision for income taxes as reflected in the consolidated statement of operations and comprehensive loss varies from the expected statutory rate primarily due to a provision for minimum state taxes and the recording of adjustments to the valuation allowance against deferred tax assets. Internal Revenue Code Section 382 (the “Code”) places a limitation on the utilization of Federal net operating loss and other credit carry-forwards when an ownership change, as defined by the tax law, occurs. Generally, this occurs when a greater than 50 percent change in ownership occurs. During 2006, Helios and Matheson Information Technology Ltd. (“Helios and Matheson Parent”) acquired a greater than 50 percent ownership of the Company. Accordingly, the actual utilization of the net operating loss carry-forwards for tax purposes are limited annually under the Code to a percentage (currently about four and a half percent) of the fair market value of the Company at the date of this ownership change. The Company maintains a valuation allowance against additional deferred tax assets arising from net operating loss carry-forwards since, in the opinion of management; it is more likely than not that some portion, or all, of the deferred tax assets will not be realized.
18. Segment Reporting
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer. The Company operates in two segments, Consulting and Technology. During the three months ended March 31, 2016, the Company only operated in the consulting segment.
The Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes our segment information for the three months ended March 31, 2017 and 2016 as well as for the balance sheet dates presented:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Consulting
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,358,062
|
|
|
$
|
1,996,261
|
|
Cost of Revenue
|
|
|
1,105,485
|
|
|
|
1,421,765
|
|
Gross Margin
|
|
|
252,577
|
|
|
|
574,496
|
|
Total operating expenses
|
|
|
(3,313,547
|
)
|
|
|
(722,916
|
)
|
Loss from operations
|
|
|
(3,060,970
|
)
|
|
|
(148,420
|
)
|
Total other income/(expense)
|
|
|
(2,091,563
|
)
|
|
|
(1,006
|
)
|
Provision for income taxes
|
|
|
(30,484
|
)
|
|
|
(3,000
|
)
|
Total net loss
|
|
$
|
(5,183,017
|
)
|
|
$
|
(150,414
|
)
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of Revenue
|
|
|
-
|
|
|
|
-
|
|
Gross Margin
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
(1,297,550
|
)
|
|
|
|
|
Income/(loss) from operations
|
|
|
(1,297,550
|
)
|
|
|
-
|
|
Total other income/(expense)
|
|
|
(16,988
|
)
|
|
|
-
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Total net loss
|
|
$
|
(1,314,538
|
)
|
|
$
|
-
|
|
HELIOS AND MATHESON ANALYTICS INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
As of March 31,
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Consulting
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
617,524
|
|
|
$
|
1,104,715
|
|
Accounts receivable
|
|
$
|
472,248
|
|
|
$
|
410,106
|
|
Unbilled receivables
|
|
$
|
54,667
|
|
|
$
|
45,207
|
|
Prepaid expenses and other current assets
|
|
$
|
622,603
|
|
|
$
|
554,338
|
|
Property and equipment
|
|
$
|
43,596
|
|
|
$
|
34,368
|
|
Intangible assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Goodwill
|
|
$
|
-
|
|
|
$
|
-
|
|
Accounts payable and accrued expenses
|
|
$
|
1,342,490
|
|
|
$
|
1,428,054
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,617,899
|
|
|
$
|
1,651,508
|
|
Accounts receivable
|
|
$
|
-
|
|
|
$
|
-
|
|
Unbilled receivables
|
|
$
|
-
|
|
|
$
|
-
|
|
Prepaid expenses and other current assets
|
|
$
|
172,069
|
|
|
$
|
42,833
|
|
Property and equipment
|
|
$
|
17,195
|
|
|
$
|
10,844
|
|
Intangible assets
|
|
$
|
5,578,040
|
|
|
$
|
6,004,691
|
|
Goodwill
|
|
$
|
4,599,969
|
|
|
$
|
4,599,969
|
|
Accounts payable and accrued expenses
|
|
$
|
454,694
|
|
|
$
|
134,450
|
|
19. Subsequent Events
In April 2017, the Company signed a three-year lease agreement for office space in Miami. The lease, for the three-year agreement starting in May of 2017, will have monthly rent payments due from the Company of $5,026 for the first twelve months, $5,177 for the second year term, and $5,332 for the final year of the contract.
In May 2017, the Company paid cash of $80,000 to redeem a convertible note payable which had been issued to the Placement Agent for services rendered in conjunction with the September Notes.