During
the period from August 16, 2017 through October 6, 2017, Helios received aggregate gross cash proceeds of $12,820,000 from the
holder of its senior secured convertible notes (the “Investor”), thereby satisfying the $10,000,000 minimum financing
condition of the MoviePass Transaction set forth in Section 4.4 of the MoviePass Purchase Agreement.
On
October 5, 2017, Helios received a cash payment of $6,970,000 from the Investor (the “October Proceeds”) pursuant
to the secured promissory note in the principal amount of $8,800,000 given by the Investor to Helios on August 16, 2017 as partial
payment for the senior secured convertible notes issued by Helios to the Investor on that date (the “August Investor Note”).
Helios used the October Proceeds to fund the Additional Loan to MoviePass. In exchange for the October Proceeds, Helios entered
into a waiver with the Investor , dated as of October 4, 2017 (the “Waiver”), pursuant to which Helios agreed to (a)
waive its right to effect a private placement or exercise any New Offering Right (as defined in the Waiver) prior to November
15, 2017, and (b) waive any right to complete an offering of its securities (except for certain excluded securities), other than
certain private placements for up to $3,000,000 in gross proceeds, during the period commencing on November 15, 2017 through the
later of (x) December 15, 2017 and (y) thirty calendar days after the earlier to occur of (I) the first date on which the registration
statement registering the resale of certain securities issuable to the Investor is declared effective by the U.S. Securities and
Exchange Commission (the “SEC”) or (II) the first date on which all of such registrable securities are eligible to
be resold by the Investor pursuant to Rule 144.
In
connection with the receipt of the October Proceeds, Helios issued the Placement Agent a placement agent warrant to purchase up
to 139,400 shares of common stock at an exercise price of $14.27 per share (the “Placement Agent Warrant”).
The
above discussion does not purport to be a complete description of the Waiver and the Placement Agent Warrant described in this
Current Report and it is qualified in its entirety by reference to the full text of the form of Waiver and the form of Placement
Agent Warrant, which are attached as exhibits to this Current Report and are incorporated herein by reference.
Certain
Information and Risk Factors Regarding MoviePass
Helios
is providing the following information and risk factors about MoviePass that it deems important to its security holders in
light of the previously announced proposed acquisition by Helios of a majority interest in MoviePass, which acquisition remains
subject to approval by Helios’ stockholders.
Overview
MoviePass
was incorporated in Delaware in 2011 and is a movie theater subscription service that allows members to see a new movie every
day in theaters nationwide for a monthly price of $9.95. Once they sign up for the MoviePass service online, subscribers are
prompted to download the MoviePass application on their smart phones and are then mailed a MoviePass debit card. The
MoviePass application shows subscribers the showtimes of all the movies that are currently showing at their local movie
theaters. Once they have received their MoviePass debit card, subscribers can use the debit card to purchase up to one movie
ticket a day at any of the movie theaters listed in the MoviePass application without paying any additional costs.
Risk
Factors Relating to MoviePass
Investing
in Helios’ securities involves a high degree of risk, particularly in light of Helios’ current investments in and pending acquisition of a majority interest
in MoviePass. Please see the risk factors set forth below relating to MoviePass
as well as those risk factors set forth in Part I, Item 1A of Helios’ most recent Annual Report on Form 10-K and in Part
II, Item 1A of Helios’ Quarterly Reports on Form 10-Q and other filings Helios makes with the SEC. Before deciding to invest in Helios’ securities, you should carefully consider these risks related to Helios and MoviePass as well as other information Helios includes
in its SEC filings. The risks and uncertainties Helios has described are not the only ones it or MoviePass faces. Additional risks
and uncertainties not presently known to Helios or that Helios currently deems immaterial may also affect Helios or MoviePass.
These risks could materially affect Helios’ business, results of operations or financial condition and cause the value of
Helios’ securities to decline.
MoviePass
has a limited operating history and history of net losses, and it is likely that it will experience net losses for the foreseeable
future.
You
should consider MoviePass’ business and prospects in light of the risks, expenses and difficulties encountered by companies
in their early stage of development. It has experienced significant net losses since its inception and, given the significant
operating and capital expenditures associated with its business plan, anticipates continuing net losses and significant negative
cash flows for the foreseeable future. If MoviePass ever does achieve profitability, of which no assurances can be given, MoviePass
may be unable to sustain or increase such profitability.
To
achieve and sustain profitability, MoviePass will need to accomplish numerous objectives, including substantially increasing the
number of paying subscribers to its service and securing additional sources of revenue and economies of scale. There is a significant
risk that MoviePass will be unable to achieve these objectives, which would damage MoviePass’ business and could lead to
the loss of Helios’ investment in MoviePass.
MoviePass
currently spends more to retain a subscriber than the revenue derived from that subscriber and MoviePass currently does not have
other sources of revenue. This results in a negative gross profit margin. MoviePass expects its negative gross profit margin to
remain significant until MoviePass can generate other sources of revenues to offset the losses or achieve substantial economies
of scale. There is no assurance MoviePass will be able to generate other sources of revenue or be able to achieve economies of
scale that would reduce the cost of revenue sufficiently to generate a positive gross profit margin. Failure to achieve positive
gross profit margin in the foreseeable future could materially and adversely impact MoviePass’ ability to sustain its operations.
MoviePass has incurred
losses since inception and has a present need for additional funding, which may be unavailable to it. As such,
MoviePass
expects it will receive a qualification on its audited financial statements for the fiscal years ended December 31, 2016 and 2015
from its independent registered public accounting firm expressing substantial doubt about its ability to continue as a going concern.
MoviePass
has incurred losses since its inception and has a present need for additional funding. These factors raise substantial doubt
about MoviePass’ ability to continue as a going concern. For the foreseeable future, MoviePass expects to fund its
operations from additional debt or equity offerings and increased revenue from subscribers. If MoviePass cannot raise
additional short-term capital, it may consume all of its cash needed for operations. There are no assurances that MoviePass
will be able to raise capital on terms acceptable to it. If MoviePass is unable to obtain sufficient amounts of additional
capital, it may be required to reduce the scope of its planned growth, which could harm its business, financial condition and
operating results. As a result, MoviePass expects that its independent registered public accounting firm will include an
explanatory paragraph in its audit report on MoviePass’ financial statements for the years ended December 31, 2016 and
2015 with respect to the uncertainty of MoviePass’ ability to continue as a going concern.
Increased
monthly usage by MoviePass’ subscribers will cause it to incur losses and negative cash flow.
MoviePass’
monthly subscription pricing plan of $9.95 per month allows a subscriber to see a new movie each day for the entire month. In
most cases, MoviePass pays the theaters the full cost for each movie ticket that a subscriber uses. Accordingly, increased movie
viewing by subscribers would result in significant and increasing losses per subscriber, negative cash flow and could impair the
ability of MoviePass to operate as a going concern absent additional sources of revenue or financing.
MoviePass
may not gain acceptance from large national exhibitors (movie theater chains), which could have a material adverse effect on MoviePass’
financial condition and results of operations.
MoviePass has
historically paid large national exhibitors full price for each ticket purchased by a MoviePass subscriber through the
MoviePass application (though in the past, MoviePass has received as much as a 20% discount on movie tickets for its
subscribers from a small group of its exhibitor partners that currently represent less than 6% of all movie tickets that
MoviePass currently purchases). Additionally, MoviePass has not historically received a benefit from any large national
exhibitors for driving MoviePass subscribers to their theaters (for example, in the form of a portion of concession sales).
MoviePass anticipates negotiating discounts on movie tickets and receiving a portion of concession sales to its subscribers
attending theaters operated by those exhibitor partners. However, if MoviePass is unable to partner with large national
exhibitors, (i) MoviePass likely will continue to be required to pay full price per movie ticket each time a
MoviePass subscriber attends a movie theater operated by a large national exhibitor, (ii) MoviePass would be unlikely to
share in concession sales to its subscribers attending those theaters, and (iii) MoviePass may not be able to sell digital
advertising or data analytics services to those large national exhibitors. If MoviePass is unable to negotiate discounted
ticket prices from, share in concession sales with or sell digital advertising or data analytics services to large national
exhibitors, MoviePass’ financial condition and results of operations may be materially and adversely affected,
MoviePass may not become profitable and MoviePass may not be able to sustain its operations.
MoviePass
may not gain acceptance from large movie studios, which could have a material adverse effect on MoviePass’ financial condition
and results of operations.
MoviePass’
success will depend, in part, on deriving revenue from sales of digital advertising and data analytics services to large movie
studios. However, if MoviePass is unable to gain acceptance from large national exhibitors (movie theater chains), upon which
large movie studios depend to distribute and exhibit their movies, then large movie studios may refrain from purchasing digital
advertising or data analytics services from MoviePass. If MoviePass is unable to derive revenue from selling digital advertising
or data analytics services to large movie studios, MoviePass’ financial condition and results of operations may be materially
and adversely affected, MoviePass may not become profitable and MoviePass may not be able to sustain its operations.
Following
the Additional Loan, MoviePass will continue to need additional capital, and it cannot be sure that additional financing will
be available.
Since inception, MoviePass
has funded its operating losses and capital expenditures through proceeds from private equity and debt financings, including through
the pending MoviePass Transaction. MoviePass has a present need for significant additional financing, and such need may continue
for the foreseeable business given the nature of MoviePass’ present operations. MoviePass’ ability to obtain financing
will depend on, among other things, its development efforts, business plans, operating performance and the condition of the capital
markets at the time it seeks financing. There is a material risk that additional financing for MoviePass will be unavailable to
it on favorable terms when required, or at all.
Even
if MoviePass raises additional funds through the issuance of equity, equity-linked or debt securities, those securities may
have rights, preferences or privileges senior to the rights of Helios, and MoviePass’ stockholders (including Helios)
may experience dilution, perhaps to a significant extent. In addition, there is no assurance that the MoviePass Transaction
will close, and even if it does close, there is no assurance that MoviePass will receive any additional cash as a result. To
close the MoviePass Transaction and receive the remaining proceeds described below (and also to ensure that the MoviePass
Note is deemed satisfied in full), MoviePass needs to complete certain milestones. MoviePass entered into the MoviePass
Purchase Agreement with Helios on August 15, 2017 in which Helios originally agreed to acquire a majority stake in MoviePass
for a purchase price of up to $27 million, which was increased to $28.5 million in connection with the Amendment. Pursuant to
the MoviePass Purchase Agreement, Helios loaned MoviePass $5,000,000 in cash, pursuant to a subordinated convertible
promissory note of MoviePass in the principal amount of $5,000,000. Such note was increased to $11.5 million pursuant to the
Amendment and, as a result, Helios’ potential ownership percentage in MoviePass increased. At the closing of the
MoviePass Transaction, in exchange for the majority stake, Helios will issue MoviePass (i) 4,000,000 unregistered shares its
common stock for a total agreed upon value of approximately $12,000,000, which such shares may not be immediately saleable;
and (ii) a promissory note in the principal amount of $5,000,000 (the “Helios Note”). Pursuant to the Helios
Note, Helios has agreed to pay $5,000,000, plus all accrued interest thereon, on the later of the 180th calendar day
following the closing or when MoviePass’ common stock becomes listed on the Nasdaq Stock Market or the New York Stock
Exchange. If MoviePass is not listed on such an exchange on or before June 1, 2018 (the “Extended Listing Maturity
Date”), then, within ten (10) business days thereafter, Helios will redeem the outstanding principal (not to exceed
$5,000,000) and accrued unpaid interest on the Helios Note as of the Extended Listing Maturity Date (the “Redemption
Amount”) in exchange for Helios tendering to MoviePass for immediate cancellation such number of MoviePass shares in
consideration of the immediate and automatic cancellation of Helios’ obligation to repay any outstanding principle and
accrued interest under the Helios Note. There can be no assurance that MoviePass will become listed on the Nasdaq Stock
Market or the New York Stock Exchange in a timely manner, if at all, which would lead to an even more urgent need on the part
of MoviePass to secure additional funding.
MoviePass’
ability to develop and implement new and updated features and services may be more difficult than expected and may not result
in sufficient increases in revenue to justify the costs.
Attracting
and retaining subscribers requires MoviePass to continue to improve the technology underlying its applications and to continue
to develop new and updated features, services and applications. If MoviePass is unable to do so on a timely basis, or if it’s
unable to implement new features and services without disrupting its existing applications, MoviePass may lose current and potential
subscribers. MoviePass relies on a combination of internal development, strategic relationships and licensing to develop its service
offering and related features. The development and implementation of new technologies, features and services may cost more than
expected, may take longer than originally expected, may require more testing than originally anticipated, or may require the acquisition
of additional personnel, technology and other resources. There can be no assurance that MoviePass’ revenue opportunities
from any new or updated technologies, applications, features or services will justify the amounts spent.
MoviePass’
success depends on its ability to maintain its brand. If events occur that damage its brand, MoviePass’ business and financial
results may be harmed.
MoviePass’
success depends on its ability to maintain the value of its brand. Maintaining, promoting, and positioning the MoviePass brand
will depend largely on the success of its marketing efforts and its ability to provide consistent, high quality products and services
through its applications. The MoviePass brand could be harmed if MoviePass fails to achieve these objectives or if its public
image or brand were to be tarnished by negative publicity. MoviePass’ reputation and brand may be harmed if it fails to
maintain a consistently high level of customer service. Executing the strategies necessary to maintain its brand may require MoviePass
to make substantial investments, and these investments may not be successful. Such failures may adversely affect MoviePass’
business, financial condition and operating results.
Any
material disruption or breach of MoviePass’ information technology systems or those of third-party partners could materially
damage subscriber and business partner relationships, and could subject MoviePass to significant reputational, financial, legal,
and operational consequences.
Despite
the implementation of security measures, the servers of MoviePass’ computing providers and other systems, and other third
parties on which MoviePass relies, are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism,
war and telecommunication and electrical failures. Any material disruption or slowdown of MoviePass’ systems or those of
third parties whom MoviePass depends upon, including a disruption or slowdown caused by MoviePass’ failure to successfully
manage significant increases in subscriber volume or successfully upgrade applicable systems, system failures, viruses, security
breaches, or other causes, could harm MoviePass’ brand and reputation, and cause revenues to decline. To the extent that
any disruption or security breach was to result in a loss of or damage to data or applications, or inappropriate disclosure of
confidential or proprietary information, MoviePass could incur liability and the further development of products and services
could be delayed. In addition, if changes in technology cause MoviePass’ information systems, or those of third parties
on whom MoviePass depends, to become obsolete, or if such information systems are inadequate to handle MoviePass’ growth,
MoviePass could lose subscribers and its business and operating results could be adversely affected.
MoviePass’
online services are dependent on the development and maintenance of the Internet infrastructure.
MoviePass’
ability to deliver its online services is dependent on the development and maintenance of the infrastructure provided by the Internet,
which is maintained by third parties. The Internet has experienced a variety of outages and other delays as a result of damages
to portions of its infrastructure, and it could face outages and delays in the future. The Internet has also experienced, and
is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues
to experience increased usage, the Internet infrastructure may be unable to support the demands placed on it. In addition, the
reliability and performance of the Internet may be harmed by increased usage or by denial-of-service attacks. Any resulting interruptions
in MoviePass’ services or increases in response time could, if significant, result in a loss of potential or existing subscribers
and, if sustained or repeated, could reduce the attractiveness of MoviePass’ service offerings.
MoviePass’
failure or inability to protect its intellectual property rights could diminish the value of its brand and weaken its competitive
position.
MoviePass
relies on a combination of trademark, trade secret, and unfair competition laws, as well as confidentiality agreements and procedures
and licensing arrangements, and where appropriate, patents and copyright to establish and protect its intellectual property rights.
There is a risk that the steps taken by MoviePass to protect its intellectual property rights will be inadequate to prevent infringement
of such rights by others, including imitation of MoviePass’ services and misappropriation of its brand. Additionally, the
process of obtaining patent or trademark protection is expensive and time-consuming, and MoviePass may not be able to prosecute
all necessary or desirable patent applications or apply for all necessary or desirable trademark applications at a reasonable
cost or in a timely manner.
Moreover,
costly and time-consuming litigation could be necessary to enforce and determine the scope of MoviePass’ proprietary rights,
and its failure or inability to obtain or maintain trade secret protection or otherwise protect its proprietary rights could adversely
affect its business. MoviePass may be subject to intellectual property-related lawsuits in various jurisdictions, and there is
a risk that MoviePass’ products or activities violate the patents, trademarks, or other intellectual property rights of
third-party claimants. MoviePass may also need to institute litigation to protect its own intellectual property from third party
infringers. Costs of supporting such litigation and disputes may be considerable, and there can be no assurances that a favorable
outcome will be obtained. Patent infringement, trademark infringement, trade secret misappropriation, and other intellectual property
claims and proceedings brought against MoviePass or brought by MoviePass, whether successful or not, could result in substantial
costs, harm to the MoviePass brand, and have an adverse effect on MoviePass’ business.
If
MoviePass is not able to manage its growth, its business could be affected adversely.
MoviePass’
subscriber base has expanded rapidly since August 15, 2017, when it announced its new subscription price of $9.95 per month. MoviePass
may not be able, for many reasons, including lack of financing or adequate personnel resources, to meet the demand to timely deliver
MoviePass cards to its subscribers or otherwise service its business. As a result, MoviePass could experience a significant slowdown
or stoppage as it attempts to serve the expanding subscriber base.
MoviePass
anticipates that further expansion of its operations will be required to address any significant growth in its subscriber base
and to take advantage of favorable market opportunities. Any future expansion will likely place significant demands on its managerial,
operational, administrative and financial resources. If it is not able to respond effectively to new or increased demands that
arise because of MoviePass’ growth, or, if in responding, MoviePass’ management is materially distracted from current
operations, MoviePass’ business may be affected adversely.
If
MoviePass’ efforts to attract and service subscribers are not successful, its revenues and results of operations will be
affected adversely.
MoviePass
must continue to attract, retain and grow the number of its subscribers. To succeed, it must continue to attract a large number
of subscribers who have traditionally used online and pay cable channels, such as Netflix, HBO and Showtime, and pay-per-view
and video-on-demand as opposed to attending movie theaters. MoviePass’ ability to attract and retain subscribers will depend
in part on its ability to consistently provide subscribers a high quality experience for purchasing passes and viewing movies
in theaters. If consumers do not perceive MoviePass’ service offering to be of high quality, or if MoviePass introduces
new services that are not favorably received by customers, it may not be able to attract or retain subscribers. If its efforts
to satisfy its existing subscribers are not successful, MoviePass may not be able to attract new subscribers, and as a result,
its revenue and results of operations will be affected adversely.
If
MoviePass is unable to compete effectively, its business will be affected adversely.
The
market for filmed entertainment ticketing services is intensely competitive and subject to rapid change. MoviePass may experience
competition that could negatively affect demand for MoviePass’ service or ability to be accepted at certain theater chains.
Current potential competitors include Atom Tickets, MovieTickets.com, Fandango as well as potential exhibitors offering their
own subscription services.
Many
consumers maintain simultaneous relationships with multiple filmed entertainment ticketing providers and can easily shift spending
from one provider to another. If MoviePass is unable to successfully compete with current and new competitors and technologies,
it may not be able to achieve adequate market share, increase its revenues, or achieve and maintain profitability.
Many
of its competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than MoviePass does. Some of its competitors have adopted, and may continue to adopt,
aggressive pricing policies and devote substantially more resources to marketing and website and systems development than MoviePass
does. In addition, MoviePass’ competitors may form or extend strategic alliances with studios, exhibitors and distributors
that could affect adversely its ability to compete on favorable terms.
The
loss by MoviePass of one or more of its key personnel, or its failure to attract, assimilate and retain other highly qualified
personnel in the future, could seriously harm MoviePass’ existing business and new service developments.
MoviePass
depends on the continued services and performance of its key personnel, particularly its Chief Executive Officer Mitch Lowe and
other key members of management. In addition, much of MoviePass’ key technology and systems are custom made for its business
by its personnel. The loss of MoviePass key managerial and key technology personnel could disrupt its operations and have an adverse
effect on its ability to grow and expand its business.