HMNY Helios and Matheson Analytics Inc (CE)

PROPOSAL 1

to the extent required by Nasdaq Listing Rule 5635( d ), to approve the issuance of shares of common stock of the Company upon conversion or exercise or otherwise pursuant to the terms of the Senior Secured Convertible Notes and the Warrant to Purchase Common Stock issued to an institutional investor

on August 16, 2017

( the Note Financing Proposal)

Capitalized terms not defined in the discussions titled “Why we are seeking stockholder approval.” and “ Effect of approval of the Note Financing Proposal on our stockholders.” may be found in the discussion titled “Information about the Note Financing.”

Why we are seeking stockholder approval.

On August 16, 2017 (the “Closing Date”), pursuant to the Securities Purchase Agreement (the “August 2017 SPA”) that we entered into on August 15, 2017 (the “Subscription Date”) with an institutional investor (the “Investor”), we sold and issued Senior Secured Convertible Notes to the Investor which included a Series A Note in the principal amount of $1,250,000 (the “Initial Series A Note”), (ii) a second Series A Note in the principal amount of $8,800,000 (the “Additional Series A Note”, collectively with the Initial Series A Note, the “Series A Notes”), and (iii) a Series B Note in the principal amount of $250,000 (the “Series B Note”, and collectively with the Series A Notes, the “Convertible Notes”) and (iv) a warrant for the purchase of 1,892,972 shares of our common stock (the “Investor Warrant”). In consideration of the issuance of the Convertible Notes and the Investor Warrant, the Investor (y) made a cash payment to the Company on the Closing Date in the amount of $220,000, and (z) gave us a secured promissory note payable by the Investor to us (the “August 2017 Investor Note”) in the principal amount of $8,800,000 (collectively, the “Note Financing”).

Our common stock is listed for trading on The Nasdaq Capital Market. Nasdaq Listing Rule 5635(d), referred to herein as the “Nasdaq 20% Rule,” requires a company with securities listed on The Nasdaq Capital Market to obtain stockholder approval if the sale, issuance or potential issuance by the company of common stock (or securities convertible into or exercisable for common stock), for less than the greater of book or market value equals 20% or more of the common stock or 20% or more of the voting power outstanding before the issuance. The threshold of the Nasdaq 20% Rule is determined based on the number of shares of common stock outstanding immediately before the issuance. On August 15, 2017, the day we and the Investor entered into the August 2017 SPA, we had 7,080,132 shares of common stock outstanding. Without stockholder approval, we are limited to issuing to the Investor an aggregate of 1,415,318 shares of our common stock, which represents 19.99% of the number of shares of common stock we had outstanding on August 15, 2017, and is not sufficient to satisfy in full the number of shares of common stock otherwise required to be issued under the Convertible Notes and the Investor Warrant.

To the extent required by Nasdaq Listing Rule 5635(d), we are seeking stockholder approval of the issuance of shares of common stock of the Company upon conversion or exercise or otherwise pursuant to the terms of the Convertible Notes and the Investor Warrant, which will be no less than 2,687,168 shares of common stock.

As described under the heading “The August 2017 Investor Note” below, approximately $8,800,000 of the purchase price of the Convertible Notes and the Investor Warrant was paid in the form of the August 2017 Investor Note and we are only guaranteed to receive cash upon prepayments of the August 2017 Investor Note in connection with conversions of the Additional Series A Note. If we receive approval from our stockholders of the Note Financing Proposal, the Investor will have the ability to convert the Additional Series A Note in full, which would allow us to receive up to $8,800,000 million in cash from prepayments of the August 2017 Investor Note. If, however, we fail to receive approval from our stockholders of the Note Financing Proposal, we will be limited to issuing to the Investor an aggregate of 1,415,318 shares of our common stock. In that case, we expect that we would receive only up to approximately $5 million in cash from the August 2017 Investor Note to the extent the Investor elects to prepay the August 2017 Investor Note.

We plan to use the proceeds from the sale of the Convertible Notes to fund our pending acquisition of MoviePass Inc. (“MoviePass”) and for general working capital. On August 15, 2017, we entered into a Securities Purchase Agreement to acquire a 51% interest in MoviePass. MoviePass provides a subscription-based service that allows moviegoers to see a number of movies in movie theaters for a monthly fee of $9.95 per month. We believe the acquisition of MoviePass will provide a significant growth opportunity to our business.

Pursuant to the terms of the August 2017 SPA, in order to comply with the Nasdaq 20% Rule, we agreed to seek stockholder approval of the issuance of shares of common stock upon conversion or exercise or otherwise pursuant to the terms of the Convertible Notes and the Investor Warrant at a special meeting of our stockholders to be held not later than October 31, 2017. If stockholder approval is not obtained at this Special Meeting, we will be required to call another special meeting to be held on or prior to December 31, 2017. If we again fail to obtain stockholder approval at that special meeting, we will be required to hold a special meeting semi-annually until stockholder approval is obtained. Calling and holding a special meeting, along with obtaining a brokers search and preparing, printing and mailing proxy statements and proxy cards, are expensive and time consuming.

In addition, the definition of “Equity Conditions” included in the Convertible Notes is expansive and includes obtaining stockholder approval of the Note Financing. A failure to obtain stockholder approval would constitute a failure of the Equity Conditions. If our stockholders do not approve this Note Financing Proposal and assuming no other failures of the Equity Conditions, we will be required to pay the Convertible Notes in cash, rather than having the option to pay the Convertible Notes with cash or with shares of our common stock. Being required to pay the Convertible Notes with cash due to the failure to obtain stockholder approval of this Note Financing Proposal would have a material and adverse effect on our cash flows, operations and financial condition.

Furthermore, the Investor Warrant prevents us from issuing any shares of our common stock upon exercise if the issuance of such shares (taken together with the issuance of shares of common stock upon conversion or otherwise pursuant to the terms of the Convertible Notes) would exceed the aggregate number of shares of common stock that we may issue upon exercise, conversion or otherwise pursuant to the terms of the Convertible Notes or Investor Warrant without breaching our obligations under the Nasdaq 20% Rule. If, after September 15, 2017, we are prevented from issuing shares of common stock upon exercise of the Investor Warrant without violating the Nasdaq 20% Rule, we will be required to pay cash to the holder of the Investor Warrant in exchange for the cancellation of such portion of the Investor Warrant that would have been exercisable into shares of our common stock at a price equal to the sum of (x) the product of (A) the number of shares of common stock that could not be obtained upon exercise of the Investor Warrant without violating the Nasdaq 20% Rule (the “Unissued Shares”) and (B) the greatest closing sale price of our common stock on any trading day during the period commencing on the date the holder delivers to us the notice of exercise with respect to the Unissued Shares and ending on the date of such payment. In addition, we must pay any brokerage commissions and other out-of-pocket expenses, if any, incurred by the holder to the extent that the holder purchased shares of common stock to deliver in satisfaction of a sale of the Unissued Shares.

Effect of approval of the Note Financing Proposal on our stockholders.

Based on the Conversion Prices of $4.00 per share of the Series A Notes and $3.00 per share of the Series B Note, and assuming that the Investor converted all of the principal and interest outstanding under the Convertible Notes on the Closing Date, we would be required to issue 2,687,168 shares of common stock to the Investor. This issuance, together with additional issuances of common stock that could be made pursuant to the Convertible Notes, for example as a result of an Event of Default, as well as the 1,892,972 shares of common stock that we would be required to issue if the Investor exercised the Investor Warrant, may cause significant dilution to our stockholders’ ownership, voting power and right to participate in dividends or other payments from future earnings, if any, and may cause a decline in the market price of our common stock. A decline in our market price could impair our ability to raise funds in additional equity or debt financings.

In addition to the foregoing, the increase in the number of shares of common stock issued in connection with the conversion of the Convertible Notes and the exercise of the Investor Warrant may have an incidental anti-takeover effect in that the additional shares of common stock issued could dilute the stock ownership of parties seeking to obtain control of the Company. The increased number of issued shares could discourage the possibility of, or render more difficult, certain mergers, tender offers, proxy contests or other change of control or ownership transactions. However, we currently know of no specific effort to accumulate our securities or to gain control of the Company by means of a merger, tender offer, solicitation in opposition to management or otherwise.

Notwithstanding the foregoing, we believe the benefits of the approval of the Note Financing Proposal exceed the potential dilutive effects and related risks described above. Our ability to complete the MoviePass transaction, succeed on our business plans and ultimately generate value for our stockholders is dependent on our ability to maximize capital raising opportunities. If the Note Financing Proposal is approved, we will be able to maximize our ability to obtain cash in the Note Financing, resulting in approximately $9.92 million in cash potentially available to us (including, $3.77 million under the Convertible Notes and, assuming the exercise in full of the Investor Warrant, $6,152,159 in cash payment of the exercise price of the Investor Warrant). This will not only provide us with significant working capital, but if we are able to pay the principal and accrued interest of the Convertible Notes with shares of our common stock, it will allow us to reduce the amount of cash we use on a monthly basis, strengthen our balance sheet and provide us with additional capital for potential future business opportunities.

Description of the Note Financing.

The following does not purport to be a complete description of the August 2017 SPA, the Senior Secured Convertible Notes, the Investor Warrant, the August 2017 Investor Note, the Registration Rights Agreement, the Security and Pledge Agreement, the Guaranty, the Voting and Lockup Agreements, and the Placement Agent Warrant described in this proxy statement and each is qualified in its entirety by reference to the full text of such document, which are attached as exhibits to our Current Reports on Form 8-K that we filed with the Commission on August 15, 2017 (the “August 15, 2017 Current Report”) and August 22, 2017 (the “ August 22, 2017 Current Report”), respectively.

Securities Purchase Agreement

On August 16, 2017 , pursuant to the August 2017 SPA, we sold and issued the Initial Series A Note in the principal amount of $1,250,000, (ii) the Additional Series A Note in the principal amount of $8,800,000, (iii) a Series B Note in the principal amount of $250,000 and (iv) the Investor Warrant for the purchase of 1,892,972 shares of our common stock. In consideration of the issuance of the Convertible Notes and the Investor Warrant, the Investor (y) made a cash payment to the Company on the Closing Date in the amount of $220,000, and (z) gave us the secured August 2017 Investor Note payable by the Investor to us in the principal amount of $8,800,000 (collectively, the “Note Financing”).

Furthermore, immediately prior to the closing of the Note Financing, the Investor paid (i) $5,000,000 of that certain promissory note given to us by the Investor on February 7, 2017 (the “February Investor Note”) as payment of the purchase price for the senior secured convertible notes (the “February Notes”) that we issued to the Investor pursuant to a Securities Purchase Agreement dated as of February 7, 2017 and (ii) $230,000 of that certain promissory note issued by the Investor to us (the “December Investor Note”) as payment for the senior secured convertible notes (the “December Notes”) that we issued to the Investor pursuant to a Securities Purchase Agreement dated December 1, 2016. Pursuant to the August 2017 SPA, we acknowledged and agreed that the Series B Note constitutes a Variable Price Security (as defined in the February Notes and the December Notes) and therefore, from and after the Closing Date, any holder of a February Note shall have the right to substitute the Alternate Conversion Price as defined in the Series B Note for the conversion price of the February Notes, and any holder of a December Note shall have the right to substitute the Alternate Conversion Price as defined in the Series B Note for the conversion price of the December Notes.

We used $4,950,000 of the net cash proceeds received by us on the Closing Date from the sale of the Convertible Notes and the Investor Warrant together with the Investor’s payments to us under the February Investor Note and the December Investor Note in order to pay $4,950,000 in cash to MoviePass upon signing the Securities Purchase Agreement, dated as of August 15, 2017, between the Company and MoviePass (the “MoviePass Securities Purchase Agreement”), for which we received a convertible note issued to us by MoviePass. Any further proceeds from the Note Financing will be used (i) to pay up to $10,000,000 to MoviePass pursuant to a subordinated convertible promissory note to be issued by us to MoviePass upon the closing of the transactions contemplated by the MoviePass Securities Purchase Agreement and (ii) for general corporate purposes. Unless earlier converted or redeemed, the Convertible Notes mature 8 months from the Closing Date.

The Note Financing was structured in order to comply with the holding period requirements of Rule 144(d)(1)(i) and 144(d)(2) so that shares of common stock issuable upon conversion of the Convertible Notes could, absent registration, be resold pursuant to Rule 144(d)(1)(i) commencing six months after the issuance of the Convertible Notes, if the other requirements of Rule 144 are satisfied, including Rule 144(d)(1)(iii).

Rule 144(d)(1)(iii) provides that the holding period of purchased securities shall not begin until the full purchase price or other consideration is paid or given by the person acquiring the securities from the issuer.

Rule 144(d)(2) provides that giving the issuer a promissory note shall not be deemed full payment of the purchase price unless the promissory note (i) provides for full recourse against the purchaser of the securities, (ii) is secured by collateral, other than the securities purchased, having a fair market value at least equal to the purchase price of the securities purchased, and (iii) shall have been discharged by payment in full prior to the sale of the securities.

The August 2017 Investor Note (i) states at Section 8(a) that it is a full recourse obligation of the Investor; (ii) is secured by at least $8,800,000 in cash, cash equivalents, any Group of Ten (“G10”) currency and any notes or other securities issued by any G10 country held by the Investor in a bank or brokerage account at First Republic Bank, as set forth on Schedule I of the August 2017 Investor Note; and (iii) upon conversion of all or part of the $8,800,000 Additional Series A Note into shares of common stock, the Investor will pay the Company an equivalent amount of the balance of the August 2017 Investor Note in cash, such that the August 2017 Investor Note shall have been discharged by payment in full as to any shares of common stock to be sold by the Investor prior to such sale. Therefore, pursuant to Rule 144(d)(2), the Investor paid the full purchase price for the Convertible Notes on the Closing Date. Accordingly, the holding period of shares of common stock issuable upon conversion of the Convertible Notes will be deemed to have commenced on the Closing Date, pursuant to Rule 144(d)(3)(ii).

Assuming that we meet the requirements of a mandatory prepayment event as described below under the heading “August 2017 Investor Note”, we expect to receive the full $8,800,000 due under the August 2017 Investor Note.

The Convertible Notes

Principal Amount

The aggregate principal amount of the Convertible Notes is $10,300,000.

As of [_________], 2017, $1,500,000 is the amount of unpaid unrestricted principal under the Convertible Notes that we owe, comprised of $1,250,000 under the Initial Series A Note and $250,000 under the Series B Note.

Maturity Date

Unless earlier converted or redeemed, the Convertible Notes mature 8 months from the Closing Date.

Interest and Payment of Interest

The Initial Series A Note does not accrue interest unless an Event of Default, as defined in the Convertible Notes, occurs and is not cured. The Additional Series A Note and the Series B Note bear interest at a rate of 6% per annum, subject to an increase to 12% during the first 30 days following the occurrence and continuance of an Event of Default, as defined in the Convertible Notes, and to 18% thereafter. Interest on the Additional Series A Note and the Series B Note will be payable in arrears commencing on October 1, 2017 and on the first trading day of each calendar quarter thereafter and, so long as no Equity Conditions Failure, as defined in the Convertible Notes, exists, may be paid in shares of our common stock, at our option. Interest on the Convertible Notes is computed on the basis of a 360-day year and twelve 30-day months.

Conversion of the Convertible Notes

The Investor may, at any time, convert the Initial Series A Note and the Series B Note into shares of the Company’s common stock at the Conversion Price, subject to certain beneficial ownership limitations. The Investor may, at any time after no December Notes, February Notes, the Series B Note or the Initial Series A Note remain outstanding, elect to convert the Additional Series A Note into shares of the Company’s common stock at the Conversion Price, subject to certain beneficial ownership limitations. The Conversion Price is $4.00 under the Series A Notes and $3.00 under the Series B Note. The Conversion Price of the Convertible Notes is subject to proportionate adjustment for stock splits, dividends and combinations. The Company may, at any time during the term of the Convertible Notes, with the prior written consent of the Investor, reduce the then current Conversion Price of each of the Convertible Notes to any amount equal to or greater than the Floor Price and for any period of time deemed appropriate by the Board. The Floor Price means $4.00 for the Series A Notes. However, for the limited purpose of making interest payments in shares of common stock during the existence of a Price Failure or a Volume Failure, as defined in the Convertible Notes, the Floor Price of the Series A Notes may be adjusted to $0.50 to the extent the Company chooses to pay interest with shares of its common stock. The Floor Price means, for the Series B Note, (i) during the period commencing on the Closing Date through and including the Adjustment Date, $3.00 or (ii) from and after the Adjustment Date, $0.50. The Adjustment Date is defined as the period beginning on the Closing Date through and including October 5, 2017. The Company and the Investor may agree to reduce the Floor Price of the Convertible Notes.

The Investor also will have the right to convert the Convertible Notes into shares of our common stock at the Alternate Conversion Price, subject to certain beneficial ownership limitations. The Alternate Conversion Price is defined as the lowest of :

(1) (i) the Conversion Price of $4.00, and (ii) the Floor Price then in effect, for the Initial Series A Note;

(2) (i) the Conversion Price of $4.00, 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, or VWAP, of our common stock for each of the five consecutive trading days ending and including the trading day immediately preceding the delivery or deemed delivery of the applicable conversion notice, divided by (y) 5, for the Additional Series A Note; and

(3) (i) the Conversion Price of $3.00, and (ii) during the period commencing on the Closing Date through the Adjustment Date, the greater of (A) the Floor Price of $3.00 and (B) 85% of the lowest VWAP of any trading day during the twenty consecutive trading day period ending and including the applicable Alternate Conversion Date, and (iii) after the Adjustment Date, the greater of (I) the Floor Price of $0.50 and (II) 85% of the quotient of (x) the sum of the VWAP of our common stock for each of the five consecutive trading days ending and including the applicable Alternate Conversion Date, divided by (y) 5, for the Series B Note.

If and to the extent the Investor elects to convert (i) the Series A Notes and (ii) during the period commencing from the Closing Date through and including the Adjustment Date (the “Initial Period”), the Series B Note, the Investor will elect to convert (i) the Series A Notes and (ii) during the Initial Period, the Series B Note, at their respective applicable Conversion Prices ($4.00 per share for the Series A Notes and $3.00 per share for the Series B Note, which are the same as the respective Alternate Conversion Prices of the Series A Notes and, during the Initial Period, the Series B Note).

We expect that, if and to the extent the Investor elects to convert the Series B Note after the Adjustment Date, the Investor will elect to convert the Series B Note at the applicable Alternate Conversion Price if 85% of the preceding 5-trading-day average VWAP of our common stock is less than the Conversion Price ($3.00 per share for the Series B Note) unless the Company has, with the consent of the Investor, reduced the Conversion Price to a price lower than the applicable Alternate Conversion Price, whereas we expect that the Investor will convert the Series B Note after the Adjustment Date at the Conversion Price if 85% of the preceding 5-trading-day average VWAP of our common stock is equal to or greater than the Conversion Price. Accordingly, in the case of voluntary conversion of the Series B Note by the Investor, in effect, the Conversion Price serves as the ceiling price and the applicable Alternate Conversion Price serves as the floor price at which the Series B Note will be converted after the Adjustment Date.

If the Equity Conditions, as defined in the Convertible Notes, are satisfied, we may require the Investor to convert all or any part of the Convertible Notes, up to the Maximum Mandatory Share Amount and the Maximum Mandatory Conversion Amount (each, a “Mandatory Conversion”). If on the fifth trading day immediately following a Mandatory Conversion Date and on each fifth trading day thereafter through and including the fifteenth trading day immediately following such Mandatory Conversion Date (each, a “True-Up Date”), the True-Up Price is less than the applicable Mandatory Conversion Price, we must deliver to the Investor an additional number of shares of our common stock equal to the difference between the number of shares of our common stock delivered to the Investor as a result of the Mandatory Conversion and the number of shares determined by dividing the principal, interest and late charges converted by the True-Up Price. The “True-Up Price” is defined as 85% of the lowest VWAP of our common stock on the trading day with the lowest VWAP during the 15 consecutive trading days following the Mandatory Conversion.

“Mandatory Conversion Date” means the third trading day following our delivery of a Mandatory Conversion Notice.

“Mandatory Conversion Price” means, with respect to any Mandatory Conversion that price which shall be the lowest of (i) the applicable Conversion Price as in effect on the applicable Mandatory Conversion Date, and (ii) 80% of the sum of (A) the VWAP of our common stock for each of the 3 trading days with the lowest VWAP of our common stock during the 20 consecutive trading day period ending on and including the trading day immediately prior to the applicable Mandatory Conversion Date divided by (B) 3.

“Maximum Mandatory Share Amount” with respect to any Mandatory Conversion Date means 100% of the quotient of (x) the sum of the composite aggregate daily share trading volume of our common stock for each trading day during the 5 trading day period ending and including the trading day immediately prior to the applicable Mandatory Conversion Notice Date, divided by (y) 5.

“Maximum Mandatory Conversion Amount” with respect to any Mandatory Conversion Date means the difference of (x) $500,000 less (y) the sum of each Conversion Amount converted under the applicable Convertible Note during the 5 trading day period ending and including the applicable Mandatory Conversion Date. 

Beneficial Ownership Limitations on Conversion and Issuance

In addition to the conversion limitations described above, the Convertible Notes may not be converted and shares of our common stock may not be issued under the Convertible Notes if, after giving effect to the conversion or issuance, the applicable holder of a Convertible Note together with its affiliates would beneficially own in excess of 9.99% of our outstanding shares of common stock. At the Investor’s option, the ownership limitation blocker may be raised or lowered to any other percentage not in excess of 9.99%, as applicable, except that any raise will only be effective upon 61-days’ prior notice to us.

Redemption of the Notes

If there has been no Equity Conditions Failure and,

as to the Series B Note, there are no December Notes or February Notes outstanding;

as to the Initial Series A Note, the Series B Note is not outstanding and there are no December Notes or February Notes outstanding; and

as to the Additional Series A Note, neither the Initial Series A Note nor the Series B Note is outstanding and there are no December Notes or February Notes outstanding;

the Company has the right to redeem all, but not less than all, of the amounts remaining unpaid under the Convertible Notes. The redemption right permits the Company to redeem all of the Conversion Amount then remaining under a Convertible Note in cash at a price equal to 115% of the Conversion Amount being redeemed. Additionally, any Restricted Principal may be offset and reduced on a dollar for dollar basis by the surrender for cancellation of the portion of the August 2017 Investor Note equal to the amount of Restricted Principal included in the Company’s redemption under the Additional Series A Note. Restricted Principal is defined in the Additional Series A Note as $8,800,000, subject to reduction as provided in the Additional Series A Note, such as by Investor prepayments or Investor offset rights under the August 2017 Investor Note.

In the event of a Change of Control or an Event of Default, each as defined in the Convertible Notes, the Investor may require the Company to redeem the Convertible Notes in cash at the Change of Control Redemption Price or the Event of Default Redemption Price, as defined in the Convertible Notes.

Events of Default

The Convertible Notes contain standard and customary Events of Default including but not limited to: (i) failure to register the Company’s common stock within certain time periods or failure to keep the registration statement effective as required by the Registration Rights Agreement; (ii) failure to maintain the listing of the Company’s common stock; (iii) failure to make payments when due under the Convertible Notes; (iv) breaches of covenants and (v) bankruptcy or insolvency.

Following an Event of Default, the Investor may require the Company to redeem all or any portion of the Convertible Notes. The redemption amount may be paid in cash or with shares of the Company’s common stock, at the election of the Investor, at a price equal to the Event of Default Redemption Price.

The Company must immediately redeem the Convertible Notes in cash upon the occurrence of a Bankruptcy Event of Default, as defined in the Convertible Notes.

The Event of Default Redemption Price will be computed as a price equal to the greater of (i) the product of (A) the Conversion Amount to be redeemed multiplied by (B) the Redemption Premium (defined as 125%) and (ii) the product of (X) the Conversion Rate (defined as the Conversion Amount divided by the Conversion Price) with respect to the Conversion Amount in effect at such time as the holder delivers an Event of Default Redemption Notice multiplied by (Y) the product of (1) the Redemption Premium multiplied by (2) the greatest closing sale price of our common stock on any trading day during the period commencing on the date immediately preceding the Event of Default and ending on the date the Company makes the entire payment required to be made under the Convertible Notes.

In addition, following an Event of Default, the holder of the Convertible Notes will have the right to convert the Convertible Notes at the “Alternate Conversion Event of Default Price” which means, with respect to any Alternate Conversion, that price which shall be the lowest of (i) the applicable Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) 75% of the lowest VWAP for each of the 30 consecutive trading days ending and including the trading day of delivery or deemed delivery of the applicable Conversion Notice.

Fundamental Transactions

The Convertible Notes prohibit the Company from entering into specified transactions involving a change of control unless the successor entity, which must be a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market, as defined in the Convertible Notes, assumes in writing all of the Company’s obligations under the Convertible Notes. The transactions contemplated by the MoviePass Securities Purchase Agreement (as in effect as of the Subscription Date) will not be deemed to be, either individually or in the aggregate, a Fundamental Transaction.

New Debt

With the exception of Permitted Indebtedness, as defined in the Convertible Notes, the Company agrees that for a period of 90 days following payment in full of the Convertible Notes, it will not incur any other debt.

Tax Effect of Original Issue Discount on the Investor

The holder of a debt instrument that is issued with an original issue discount, or OID, must include part of the OID in gross income in each taxable year that the debt instrument is held, even though the OID is not paid until maturity. The discount is additional taxable interest to the holder. However, OID rules do not apply to short term obligations with a term of one year or less.

August 2017 Investor Note

The August 2017 Investor Note will be payable in full by the Investor on April 16, 2018, which is eight months from the Closing Date. As noted above, the Investor’s obligation to pay the August 2017 Investor Note is secured by $8,800,000, in the aggregate, in cash, cash equivalents, any G10 currency and any notes or other securities issued by any G10 country belonging to the Investor and provides for full recourse against the Investor. The Company will receive a payment of principal and interest upon each voluntary or mandatory prepayment of the August 2017 Investor Note. On or after August 31, 2017 (or earlier if the Company permits), the Investor may, at its option and at any time, voluntarily prepay the August 2017 Investor Note, in whole or in part. The August 2017 Investor Note is also subject to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the following mandatory prepayment events:

(1) Mandatory Prepayment upon Conversion of Convertible Notes – At any time (i) if we receive a conversion notice from the Investor in which all, or any part of the Convertible Notes to be converted included any Restricted Principal and (ii) the Investor receives a confirmation from our transfer agent that it has been irrevocably instructed by us to deliver to the Investor the shares of our common stock to be issued pursuant to the conversion notice.

(2) Mandatory Prepayment upon Mandatory Prepayment Notices – We may require the Investor to prepay the August 2017 Investor Note by delivering a mandatory prepayment notice to the Investor, subject to (i) the satisfaction of the Equity Conditions, and (ii) the Investor’s receipt of a valid written notice by us electing to effect a mandatory conversion of Restricted Principal not in excess of the Maximum Mandatory Share Amount or the Maximum Mandatory Conversion Amount (each as defined above).

The August 2017 Investor Note also contains certain optional offset rights in favor of us and the Investor which, if exercised, would reduce the amount outstanding under the Convertible Notes and the August 2017 Investor Note by the same amount and, accordingly, the cash proceeds we receive from the Investor pursuant to the Note Financing. These offset rights are triggered by specific occurrences that could jeopardize the Investor’s investment and include the following:

Investor Optional Offset – The Investor may, on or after September 30, 2017, if an Equity Conditions Failure exists, satisfy any principal and related accrued and unpaid interest owed under the August 2017 Investor Note in full by cancelling an equal amount of principal amount under the Additional Series A Note.

Event of Default and Bankruptcy Event of Default Offsets – The Investor may, at any time on or after the occurrence of any Event of Default under the Additional Series A Note, but prior to the date of cure thereof, at its sole discretion, satisfy all, or any part, of any principal and related accrued and unpaid interest owed under the August 2017 Investor Note in full by cancelling an equal amount of principal under the Additional Series A Note. Furthermore, in the event of a Bankruptcy Event of Default, as defined in the Convertible Notes, all of the principal and related accrued and unpaid interest of the August 2017 Investor Note will be automatically satisfied in full by the deemed automatic surrender and concurrent cancellation of the outstanding obligations under the Additional Series A Note equal to the portion of principal being satisfied.

Automatic Offset Upon Prohibited Transfers of the Additional Series A Note – If for any reason the Additional Series A Note or any interest therein is pledged, assigned or transferred to any person other than the Company without the prior written consent of the Investor, including by contract, operation of law, court order or otherwise, then, (i) all of the outstanding principal of the August 2017 Investor Note will be automatically deemed satisfied in full, (ii) 75% of the remaining Restricted Principal will be automatically cancelled (with the remaining 25% of the Restricted Principal of the Additional Series A Note automatically becoming unrestricted principal thereunder), and (iii) the August 2017 Investor Note will be deemed to be paid in full and will be null and void.

Upon any of the foregoing offsets, any accrued and unpaid interest under the August 2017 Investor Note will be automatically cancelled with respect to the portion of the principal of the August 2017 Investor Note being offset.

The August 2017 Investor Note also includes an offset right in favor of the Company. The Company, if it so chooses, is entitled to reduce the principal amount of the August 2017 Investor Note, and any accrued but unpaid interest, by any cash amount then due and payable by the Company to the Investor under the Additional Series A Note. This offset right allows the Company to satisfy any redemption amount or any other cash obligations then due and payable under the Additional Series A Note.

The Investor Warrant

In addition to the Convertible Notes, we issued a 5-year Warrant to the Investor on the Closing Date for the purchase of 1,892,972 shares of our common stock (the “Investor Warrant Shares”), at an exercise price of $3.25 per share, subject to adjustment as provided in the Investor Warrant. If, after the six-month anniversary of the issuance date of the Investor Warrant, there is no effective registration statement registering, or no current prospectus available for, the resale of the Investor Warrant Shares by the Investor, then the Investor Warrant may also be exercised, in whole or in part, by means of a “cashless exercise.” The Investor Warrant may not be exercised if, after giving effect to the exercise the Investor, together with its Attribution Parties (as defined in the Investor Warrant), would beneficially own in excess of 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the issuance of the Investor Warrant Shares. At the Investor’s option, the ownership limitation blocker may be raised or lowered to any other percentage not in excess of 9.99%, as applicable, except that any raise will only be effective upon 61-days’ prior notice to us.

On or after the Subscription Date, if we issue or sell common stock, or convertible securities or options issuable or exchangeable into our common stock (a “New Issuance”), under which such common stock is sold for a consideration per share less than the exercise price then in effect, the exercise price of the Investor Warrant will be adjusted to the New Issuance price in accordance with the formulas provided in the Investor Warrant. Upon any adjustment to the exercise price, the number of Warrant Shares that may be purchased upon exercise of the Investor Warrant will be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable for the adjusted number of Warrant Shares will be the same as the aggregate exercise price in effect immediately prior to such adjustment. In addition, if we sell Variable Price Securities (as defined in the Investor Warrant) after the Subscription Date, the Investor will have a right to substitute the Variable Price (as defined in the Investor Warrant) for the exercise price under the Investor Warrant.

Security and Pledge Agreements and Guaranty

On the Closing Date, the Company and its wholly-owned subsidiaries, Zone Technologies, Inc. (“Zone”) and HMNY Zone Loan LLC, each entered into a Security and Pledge Agreement in favor of the Investor as Collateral Agent. Pursuant to the Security and Pledge Agreement, the Convertible Notes are secured by a perfected first priority security interest in all of the assets of the Company, Zone and HMNY Zone Loan LLC, subject to Permitted Liens, as defined in the Convertible Notes.

Zone and HMNY Zone Loan LLC also provided a Guaranty to the Investor as Collateral Agent whereby they guarantee the punctual payment of all obligations that accrue after the commencement of any insolvency proceeding of the Company, whether or not the payment of such obligations are enforceable or allowable in the insolvency proceeding, and all fees, interest, premiums, penalties, causes of actions, costs, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Note Financing documents, and agree to pay any and all costs and expenses (including counsel fees and expenses) incurred by the Collateral Agent in enforcing any rights under the Guaranty or any other Note Financing document.

Registration Rights Agreement

Under the terms of a Registration Rights Agreement, we are required to register for resale the shares of common stock that are issuable upon conversion of the Convertible Notes or upon exercise of the Investor Warrant, additional shares that could be used as payment of monthly interest plus an additional number of shares so that the total number of shares of common stock registered equals 125% of (i) the sum of the maximum number of shares issuable upon conversion of the Convertible Notes and (ii) the sum of the maximum number of shares issuable upon exercise of the Investor Warrant. The Registration Rights Agreement requires us to file the registration statement within 30 days after the Closing Date and to have the registration statement declared effective 90 days after the Closing Date (or 120 days after the Closing Date if the registration statement is subject to review by the SEC).

The Registration Rights Agreement provides for the payment of liquidated damages of 1.5% of the product of (x) the number of shares of common stock required by the Registration Rights Agreement to be included in the registration statement and (y) the Closing Sale Price, as defined in the Registration Rights Agreement, as of the trading day immediately prior to the date a Registration Delay Payment, defined as the failure to file the registration statement in the time required, the failure to have the registration statement declared effective in the time required, the failure to maintain the effectiveness of the registration statement or the failure to keep current public information in the marketplace.

We are required to keep the registration statement effective (and the prospectus contained therein available for use) pursuant to Rule 415 for resales on a delayed or continuous basis at then-prevailing market prices at all times until the earlier of (i) the date as of which the Investor may sell all of the common stock issuable pursuant thereto without restriction pursuant to Rule 144 or (ii) the date on which all of the common stock covered by the registration statement shall have been sold. 

Voting and Lockup Agreements

As a condition to closing the Note Financing, Theodore Farnsworth, our Chief Executive Officer and Chairman of the Board, and Helios & Matheson Information Technology Ltd. (“HMIT”), of which Muralikrishna Gadiyaram, one of our directors and a consultant of the Company, is the chief executive officer, and its wholly-owned subsidiary, Helios & Matheson Inc. (collectively, the “Principal Stockholders”) who, as of the record date, collectively own approximately 39.4% of our issued and outstanding common stock, executed Voting and Lockup Agreements with the Company. Pursuant to the Voting and Lockup Agreements, the Principal Stockholders agree to vote in favor of our issuance of shares of common stock upon conversion or exercise or otherwise pursuant to the terms of the Convertible Notes and the Investor Warrant, to the extent required by Nasdaq Listing Rule 5635(d). The Voting and Lockup Agreements also require that, for a period beginning on the Closing Date and ending on the date when all of the principal outstanding under the Convertible Notes issued to the Investor consists of Restricted Principal thereunder, the Principal Stockholders will not (i) dispose of or agree to dispose of, directly or indirectly, any securities of the Company, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any securities of the Company owned directly by the Principal Stockholders (including holding as a custodian) or (iii) permit to exist any security interest, lien, claim, pledge, option, right of first refusal, agreement, or limitation on the Principal Stockholders’ voting rights, charge or other encumbrance of any nature with respect to the Principal Stockholders’ securities in the Company or (iv) engage in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Principal Stockholders’ securities in the Company or (v) directly or indirectly initiate, solicit or encourage any person to take actions which could reasonably be expected to lead to the occurrence of any of the foregoing. However, 100,000 shares of the shares owned by HMIT will not be subject to the restriction on transfer under its Voting and Lockup Agreement commencing as of the second day after the Company obtains stockholder approval of the Note Financing.

Placement Agent Warrant

As partial payment for its placement agent services, Palladium Capital Advisors LLC (“Palladium”) will receive 5-year warrants (the “Placement Agent Warrants”) for the purchase of 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the Convertible Notes becomes convertible (the “Palladium Warrant Shares”), as and when applicable, at an exercise price equal to the greater of (i) the Conversion Price as applicable and (ii) the consolidated closing bid price of Company’s common stock on The Nasdaq Capital Market on the date Palladium becomes entitled to the warrant, without regard to any increase in shares issuable under a ratchet, “true up” or similar provision of the Convertible Notes. The Placement Agent Warrants cannot be exercised for a period of 6 months from the applicable date of issuance. If, after the first anniversary of the applicable issuance date of each Placement Agent Warrant, there is no effective registration statement registering, or no current prospectus available for, the resale of the Palladium Warrant Shares by Palladium, then the Placement Agent Warrant may also be exercised, in whole or in part, by means of a “cashless exercise.” The Placement Agent Warrants may not be exercised if, after giving effect to the exercise Palladium, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of the Palladium Warrant Shares. Upon not less than 61 days’ prior notice to us, Palladium may increase or decrease the ownership limitation to an amount not exceeding 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of the Palladium Warrant Shares.

Palladium will also receive 8% of the gross cash proceeds actually received by us pursuant to payments by the Investor under the Convertible Notes and the Investor Warrant.

Vote required to pass the Note Financing Proposal.

This Note Financing Proposal will be approved if a quorum is present at the Special Meeting and a majority of the shares of common stock present or represented by proxy and entitled to vote at the Special Meeting are voted “for” such approval. Abstentions will have the effect of a vote against the Note Financing Proposal. Broker non-votes will not count as votes for or against the Note Financing Proposal and will have no effect on the outcome.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE NOTE FINANCING PROPOSAL TO APPROVE, TO THE EXTENT REQUIRED BY THE NASDAQ 20% RULE, the issuance of shares of our common stock upon conversion OR EXERCISE OR OTHERWISE PURSUANT TO THE TERMS of the Convertible Notes AND THE INVESTOR WARRANT