The accompanying
notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying
notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1. General
The
accompanying unaudited interim condensed consolidated financial statements (“interim statements”) of Helios and Matheson
Analytics Inc. (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 8 of
Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information
and footnotes required by 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. Change in Controlled Company Status
Prior
to the merger between the Company’s 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., the former parent (referred to in this report
as “HMIT”), was the beneficial owner of approximately 75% of the Company’s outstanding common stock. Upon consummation
of the merger on November 9, 2016, the Company ceased to be a controlled company under NASDAQ Listing Rule 5615(c)(1).
3. Merger with Zone Technologies, Inc.
On
November 9, 2016 (the “Closing Date”), the Company completed the merger contemplated by the Agreement and Plan of
Merger, dated as of July 7, 2016, among the Company, 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 its common stock as merger consideration pursuant to the Merger Agreement,
which represented an exchange ratio of 0.174 shares of the Company’s common stock for each share of Zone common stock outstanding,
and Zone Acquisition, the wholly-owned subsidiary, was merged into Zone, with Zone surviving the merger as the Company’s
wholly-owned subsidiary.
Zone
is the developer of the proprietary RedZone Map™, a GPS-driven, real-time crime and navigation map application whose goal
is to enhance personal safety worldwide by providing users with real-time crime data and a platform for alerting other users to
criminal and other safety related occurrences in a navigation map format. Zone’s mapping lets users be pro-active when traveling,
allowing them to enter a number of different cautionary items such as traffic problems, police sightings, road hazards, accidents
and road closures. It also allows users to report a crime and to video upload live incidents.
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
jurisdictions more meaningfully. The fourth component, when implemented, will be to work with governmental agencies using advanced
mapping and geo-fencing for counter-terrorism efforts.
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.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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
|
|
|
|
|
(1,352,133
|
)
|
Aggregate fair value of purchase consideration, non–controlling interest and net liabilities assumed allocated to intangible assets as follows:
|
|
|
|
|
Technology
|
|
|
4,270,000
|
|
Broker Relationships
|
|
|
4,200
|
|
Trademarks
|
|
|
1,977,000
|
|
Goodwill
|
|
|
4,599,969
|
|
Total purchase price allocation
|
|
$
|
10,851,169
|
|
4. Securities Purchase Agreement
On August 15, 2017 the Company and MoviePass Inc., a privately held Delaware corporation (“MoviePass”),
entered into a securities purchase agreement (the “MoviePass SPA”), pursuant to which the Company agreed to purchase
shares of common stock of MoviePass equal to fifty one percent of the then outstanding shares of MoviePass’ common stock
(the “MoviePass Shares”) for an aggregate purchase price of up to $27,000,000 which is subject to the satisfaction
or waiver of certain conditions set forth in the MoviePass SPA. MoviePass is a subscription-based service that allows moviegoers
to see a number of movies in movie theaters for a monthly fee.
At the closing of the MoviePass transaction, in exchange for the MoviePass Shares, the Company will issue
to MoviePass (i) 3,333,334 unregistered shares of HMNY’s common stock for a total agreed upon value of approximately $10,000,000;
and (ii) a promissory note in the principal amount of $10,000,000. Of the Company’s common shares being offered, 666,667
shares shall be subject to forfeiture by MoviePass if MoviePass fails to achieve either of the following two milestones within
the specified time frame: (A) within one year after the closing, subscribers to MoviePass’ MoviePass product shall have exceeded
on at least one day 100,000 subscribers, and (B) MoviePass’ common stock shall have been listed on The Nasdaq Stock Market
(“Nasdaq”) or New York Stock Exchange by January 31, 2018. As of September 30, 2017, the MoviePass transaction had
not been completed.
On October 6, 2017,
the Company and MoviePass amended the MoviePass SPA in connection with an additional loan made by the Company to MoviePass in the
amount of $6,500,000. Of the loan amount, $1,500,000 will be allocated, upon the completion of the transaction, to the purchase
of additional shares of MoviePass common stock, thereby increasing the purchase price from $27,000,000 to $28,500,000.
On October 11, 2017, the Company and MoviePass entered into an investment option agreement (the “Option
Agreement”), pursuant to which the Company was granted an option to purchase additional shares of MoviePass common stock
in an amount up to $20 million based on a pre-money valuation of MoviePass of $210,000,000 (the “MoviePass Option”)
amounting to an additional investment of up to 8.7% of the currently outstanding shares of MoviePass common stock (as defined in
the MoviePass Option Agreement), giving effect to the closing of the transaction. The MoviePass Option may be exercised by the
Company until 5:00 p.m. Eastern Time on the thirtieth day after the Company receives MoviePass’ audited financial statements
for the years ended December 31, 2016 and 2015 and the reviewed unaudited interim financial statements for the periods ended September
30, 2017 and 2016.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
5. Licensing Agreement with Is It You Ltd.
On
May 18, 2017, the Company entered into an Amended and Restated License Agreement (the “Agreement”) with Is It You
Ltd., an Israeli company (“Licensor”), which is engaged in developing and marketing software that enables face recognition
authentication and verification of users on mobile smartphones. Pursuant to the Agreement, the Company was granted a non-transferable,
non-sublicensable, non-exclusive right and license (a) to integrate the licensed software with the Company’s RedZone Map
family of products, applications, and services (the “RedZone Apps”) to create integrated service offerings that integrate
and/or incorporate the licensed software with the RedZone Apps (the “Integrated Offerings”); (b) to commercialize,
distribute, and sell the Integrated Offerings to customers worldwide; (c) to use the licensed software internally to create a
non-commercial lab/testing environment; and (d) to use the licensed software to provide maintenance and support services to customers
of the Integrated Offerings. In consideration of the license, the Company is required to pay the Licensor a one-time license fee
of $80,000 for up to 1.6 million end-user licenses. In addition, in the event that the Company exceeds 1.6 million users of the
Integrated Offerings, it will be required to pay the Licensor an additional one-time license fee of $20,000 for up to an aggregate
of 20 million end-user licenses; in the event that the Company exceeds 20 million users of the Integrated Offerings, it will be
required to pay the Licensor an additional one-time license fee of $1,000,000 for up to an aggregate of 100 million end-user licenses;
and in the event the Company exceeds 100 million users of the Integrated Offerings, it will negotiate with the Licensor the additional
compensation to be paid to the Licensor.
Of
the total $80,000 due in initial one-time license fees, $40,000 has been paid and was recorded to Research and Development Expense
for the period ended September 30, 2017.
Pursuant
to the Agreement, the Licensor agreed to not license, sell or transfer the licensed software to any third party that wishes to
integrate the licensed software with applications that compete with the Company’s Integrated Offerings relating to crime
and terrorism mapping applications.
The
Agreement has an initial term of 5 years and shall be automatically renewed for additional one-year terms unless either party
gives the other party 60 days advanced notice of termination prior to the expiration of the then-current term. Except for termination
of the Agreement by the Licensor for breach by the Company, notwithstanding any termination or expiration of the Agreement, (i)
the license shall remain in effect; and (ii) the Company shall have the right to order and the Licensor shall have the obligation
to provide annual support services at the price set forth in the Agreement for up to 5 years from the effective date of termination.
The Agreement may be terminated at any time by either party (i) if the other party materially breaches the Agreement and continues
in such breach for 30 days after receiving notice from the non-breaching party; or (ii) for a period of 90 consecutive days, the
other party is declared to be insolvent or is the subject of bankruptcy or liquidation proceedings, or has a receiver, judicial
administrator or similar officer appointed over all or any material part of its assets, or any security holder or encumbrance
lawfully takes possession of any property of or in possession of the other party, or if the other party ceases to carry on its
business.
6. Acquisition of Assets from Trendit Ltd.
On
May 25, 2017, Zone completed the acquisition of all of the assets of Trendit Ltd. (“Trendit”), an Israel-based technology
company, including certain patented technology, for cash compensation of $195,143. Zone plans to integrate the patented technology
with the Redzone Map app, in order to enable the app to track and analyze real-time crowd behavior, migration and trends. The
patented technology predicts population behavior, along with population size, origin and destination, with an accuracy rate of
85%-90%, and tracks demographic segmentation of a population using a population sample of 15%, together with anonymous cellular
signals and demographic big data.
The
technology acquired collects data from regular cellphone activity, which it tracks and compares with extensive social/economic
databases. Zone plans to use this patented, highly-sophisticated analytical technology to alert RedZone Map app users of potential
threats to their personal safety and to inform law enforcement and government officials of the location and migration patterns
of known criminal or terrorist individuals and groups.
7. 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. The attainment of profitable operations is
dependent on future events, including obtaining adequate financing to fulfill the Company’s 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 of September 30, 2017,
had an accumulated deficit of $98,593,770, a net loss for the three and nine months ended September 30, 2017 of $43,460,218 and
$55,179,589, respectively, and net cash used in operating activities for the nine months ended September 30, 2017 of $7,644,296,
and net cash provided by operating activities for the nine months ended September 30, 2016 of $39,578.
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 September 30, 2017, the Company had cash and a working capital deficit of $1,663,879 and $33,867,870
respectively, and during the nine months ended September 30, 2017, the Company used cash from operations of $7,644,296. Of the
working capital deficit, $38,622,880 pertained to warrant and derivative liabilities classified on the balance sheet within short
term liabilities. Management has evaluated the significance of the conditions described above in relation to the Company’s
ability to meet its obligations and concluded that, without additional funding, the Company will not have sufficient funds to meet
its obligations within one year from the date the condensed consolidated financial statements were issued. While management plans
to raise additional capital from sources such as sales of its debt or equity securities or loans in order to meet operating cash
requirements, there is no assurance that management’s plans will be successful. Having said this, the Company secured financing
of $100,000,000 on November 7, 2017 which the Company can use for the MoviePass transaction and for general corporate purposes.
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.
8. 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 (“U.S. 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.
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 and nine months ended September 30, 2017 and 2016.
Revenue
Recognition
Consulting
revenues are recognized as services are provided. The Company primarily provides consulting services under time and material contracts,
whereby revenue is recognized as hours and costs are incurred. Clients for consulting revenues are billed on a weekly or monthly
basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method,
which is based on costs incurred to date relative to total estimated costs. Any anticipated contract losses are estimated and
accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based
on services performed in advance of customer billings. Revenue from sales of software licenses is recognized upon delivery of
the software to a customer because future obligations associated with such revenue are insignificant.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Research
and Development
Research
and development costs are charged to operations when incurred and are included in operating expenses.
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.
Fair
Value Measurements
ASC
Topic 820,
Fair Value Measurement and Disclosures
, defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy
which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of
inputs that may be used to measure fair value:
Level
1: Observable inputs such as quoted prices (unadjusted) in an active market for identical assets or liabilities.
Level
2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar
assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not
active.
Level 3: Unobservable inputs
that are supported by little or no market activity, therefore the inputs are developed by the Company using estimates and assumptions
that the Company expects a market participant would use.
The
carrying value of the Company’s short-term investments, prepaid expenses and other current assets, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short-term maturity of these financial instruments.
The
derivative liability in connection with the conversion feature of the Company’s convertible debt and warrants is classified
as a level 3 liability, and is the only financial liability measured at fair value on a recurring basis.
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 is computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the
period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to
include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been
issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares
issuance arrangements, stock options or warrants.
The
following table shows the outstanding dilutive common shares excluded from the diluted net loss per share calculation as they
were anti-dilutive:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Warrants
|
|
|
2,401,236
|
|
|
|
70,714
|
|
Conversion features on convertible notes
|
|
|
1,342,333
|
|
|
|
511,989
|
|
Total potentially dilutive shares
|
|
|
3,743,569
|
|
|
|
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 Accounting Standards Update “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 in the process of performing an initial review of custom contracts to determine
the impact that ASU 2014-09 and its subsequent updates through December 31, 2017 will have on the Company’s consolidated financial
statements or financial statement disclosures upon adoption. The Company is currently evaluating the overall impact that ASU 2014-09
will have on the Company’s consolidated financial statements, as well as the expected timing and method of adoption. The
Company has established an implementation team, including external advisers, and has commenced the review of the Company’s
revenue portfolio and related contracts. Discussions regarding changes to the Company’s current accounting policies and
practices remain ongoing and preliminary conclusions are subject to change.
Upon
adoption, the Company will recognize revenue from contracts with customers as each performance obligation is satisfied, either
at a point in time or over a period of time, based on when control transfers to customers. The Company plans to adopt the new
revenue recognition standard under the modified retrospective transition method by recognizing the cumulative effect of applying
the standard as an adjustment to the Company’s Balance Sheet. Until the Company completes testing of the new revenue recognition
system, the Company does not anticipate being able to provide the impact of the new standard on the Balance Sheets or Statements
of Operations however from the initial review and assessment of a sample of contracts with customers the Company does not anticipate
the new accounting pronouncement to have a material impact on the Company’s financial statements.
During
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments — Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities
, (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement,
presentation, and disclosure of financial instruments. This ASU is effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. Early adoption is not permitted with the exception of certain provisions related to
the presentation of other comprehensive income.
In
February 2016, the FASB issued ASU 2016-02,
Leases,
(“ASC 842”), which supersedes FASB ASC 840,
Leases
and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors.
The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on
the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine
whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease.
A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve
months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance
for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption
permitted upon issuance. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-02 on
its results of operations, cash flows and financial position.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
In
May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers
(“ASC 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) clarify
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) clarify that an entity that retrospectively applies the guidance in ASC 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 ASC 606. The guidance is effective for the Company beginning
January 1, 2018, although early adoption is permitted beginning January 1, 2017. As stated above, the Company is in the process
of performing an initial review of customer contracts to determine the impact that ASU 2014-09 and its subsequent updates through
December 31, 2017 will have on the Company’s consolidated financial statements or financial statement disclosures upon adoption.
Until the Company completes testing of the new revenue recognition system, the Company does not anticipate being able to provide
the impact of the new standard on the Balance Sheets or Statements of Operations however from the initial review and assessment
of a sample of contracts with customers the Company does not anticipate the new accounting pronouncement to have a material impact
on the Company’s financial statements.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows
(“ASC 230”)
: Classification of Certain
Cash Receipts and Cash Payments,
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts
and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
Income Taxes
(“ASC 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 2016-16 on its consolidated
financial statements.
In
November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
(“ASC 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
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share
(“ASC 260”)
, Distinguishing Liabilities from
Equity
(“ASC 480”)
, and Derivatives and Hedging
(“ASC 815”). ASU No. 2017-11 is intended to simplify
the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed are: (i) determining
whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities from equity
for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily redeemable non-controlling
interests. ASU No. 2017-11 is effective for the Company on January 1, 2019. The Company is currently evaluating the potential
impact of ASU No. 2017-11 on the Company’s consolidated financial statements.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
9. Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets consisted of the following at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Vendor Deposits
|
|
$
|
312,140
|
|
|
$
|
300,199
|
|
Tax
|
|
|
95,875
|
|
|
|
187,776
|
|
Insurance
|
|
|
87,907
|
|
|
|
44,517
|
|
Professional fees and services
|
|
|
94,066
|
|
|
|
42,833
|
|
Rent
|
|
|
88,260
|
|
|
|
13,087
|
|
Other
|
|
|
29,620
|
|
|
|
8,759
|
|
Total prepaid expenses and other current assets
|
|
$
|
707,868
|
|
|
$
|
597,171
|
|
10. Convertible Promissory Note of MoviePass
On August 15, 2017,
in connection with the MoviePass SPA, the Company loaned MoviePass $4,950,000 in cash pursuant to a Second Amended and Restated
Subordinated Convertible Note Purchase Agreement whereby, in exchange for such cash payment, the Company received a subordinated
convertible promissory note of MoviePass in the principal amount of $5,000,000, which includes an additional $50,000 that was
advanced by the Company to MoviePass prior to such date for legal and audit expenses (the “Original MoviePass Note”).
The Original MoviePass Note accrues interest at a rate of 5% per annum and is due and payable two years from the date of
issuance. The Original MoviePass Note provides that it will be cancelled automatically upon the closing of the MoviePass
transaction described in Note 4. The Original MoviePass Note provides that if the MoviePass SPA is terminated by the Company
or MoviePass due to a material breach of any representation, warranty or covenant of the Company or MoviePass, and such breach
remains uncured, the outstanding principal amount and any accrued but unpaid interest under the Original MoviePass Note may, at
the Company’s option, be converted, in whole or in part, into equity securities of MoviePass issued and sold at the initial
closing of the next equity financing undertaken by MoviePass in a single transaction or a series of related transactions yielding
gross proceeds to MoviePass of at least $1,000,000, at a 20% discount to the price of the securities sold in such next equity
financing of MoviePass.
As
described in Note 4, on October 6, 2017, the MoviePass Note was amended and restated to increase the principal amount from $5,000,000
to $11,500,000.
On November 6, 2017, MoviePass entered into a Waiver Agreement whereby it irrevocably waived its rights
to terminate the MoviePass SPA for any reason.
11. Property and Equipment, net
Property
and equipment, net on September 30, 2017 and December 31, 2016 are as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Equipment and leaseholds
|
|
$
|
98,587
|
|
|
$
|
106,460
|
|
Furniture and fixtures
|
|
|
139,012
|
|
|
|
34,186
|
|
Software
|
|
|
177,225
|
|
|
|
167,337
|
|
Subtotal
|
|
|
414,824
|
|
|
|
307,983
|
|
Less: Accumulated depreciation
|
|
|
280,119
|
|
|
|
262,771
|
|
Total property and equipment, net
|
|
$
|
134,705
|
|
|
$
|
45,212
|
|
The Company recorded depreciation expense of $6,054 and $9,478 for the three months ended September 30,
2017 and 2016, respectively, and $17,348 and $2,251 for the nine months ended September 30, 2017 and 2016, respectively.
12. Intangible Assets, net and Goodwill
The
Company’s intangible assets consisted of the following on September 30, 2017 and December 31, 2016:
|
|
|
|
|
September 30,
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
|
|
Trendit Patents
|
|
|
1-11
|
|
|
|
195,143
|
|
|
|
-
|
|
Subtotal
|
|
|
|
|
|
$
|
6,446,343
|
|
|
$
|
6,251,200
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(1,530,527
|
)
|
|
|
(246,509
|
)
|
Total Intangible assets, net
|
|
|
|
|
|
$
|
4,915,816
|
|
|
$
|
6,004,691
|
|
The
Company recorded amortization expense of $430,716 and $0 for the three months ended September 30, 2017 and 2016, respectively,
and $1,284,018 and $0 for the nine months ended September 30, 2017 and 2016, respectively.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
following table outlines estimated future annual amortization expense for the next five years and thereafter:
September 30,
|
|
|
|
Remaining 2017
|
|
$
|
430,716
|
|
2018
|
|
|
1,722,864
|
|
2019
|
|
|
1,517,271
|
|
2020
|
|
|
299,530
|
|
2021
|
|
|
299,409
|
|
Thereafter
|
|
|
646,026
|
|
Total
|
|
$
|
4,915,816
|
|
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 Impairment Charge
|
|
|
-
|
|
Balance as of September 30, 2017
|
|
$
|
4,599,969
|
|
13. Securities Purchase Agreement
Senior
Secured Convertible Notes and Warrants
On September 7, 2016, the Company issued Senior Secured Convertible Notes (“September 2016 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. The September 2016 Notes had a maturity date of December 7, 2017.
As of September 30, 2017, the Investor had 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 2016 Notes. On any principal balance owed by
the Company to the Investor, a 6% interest obligation was due quarterly and calculated on a 360 day basis. For the three and nine
months ended September 30, 2017, the Company had interest expense of $0 and $1,217 related to the September 2016 Notes as the final
principal balance was converted in January of 2017.
On December 2, 2016, the Company issued two Senior Secured Convertible Notes (the “December 2016
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
2016 Investor Note”) in the principal amount of $4,900,000 to aid in the funding of Zone. prior to the entity’s ability
to generate revenues. The December 2016 Notes have a maturity date of August 2, 2017 which was subsequently amended to 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 convert the December 2016 Notes into shares of the Company’s common stock (a “Mandatory Conversion”). On September
19, 2017 (the “Exchange Date”) the Company and the Investor entered into an Amendment and Exchange Agreement pursuant
to which the Company exercised its Mandatory Conversion right as to $890,000 of the December 2016 Notes in exchange for 445,367
shares of the Company’s common stock and the Investor prepaid $670,000 of the December 2016 Investor Note, which represented
the entire unpaid principal amount of the December 2016 Investor Note. On the Exchange Date, the Company issued to the Investor
a Senior Promissory Note in the principal amount of $697,000 (the “September 2017 Note”) in exchange for the remaining
outstanding principal amount of the December 2016 Notes. The September 2017 Note may be converted into shares of the Company’s
common stock at a price of $3.00 per share. As of September 30, 2017, the Investor had not converted any portion of the September
2017 Note into shares of the Company’s common stock. The September 2017 Note is non-interest bearing. Interest for the December
2016 Notes accrued at the rate of 6%, was due quarterly and was calculated on a 360-day basis. For the three and nine months ended
September 30, 2017, the Company had $12,719 and $150,265, respectively, of interest expense pertaining to the unpaid principal
amount of the December 2016 Notes.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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. prior to the entity’s ability to generate revenues. The February 2017 Notes have a maturity
date of October 8, 2017. As of September 30, 2017, the Investor had made the following prepayments of the February 2017 Investor
Note: $2,100,000 on August 15, 2017 and $2,900,000 on August 16, 2017. As of August 28, 2017, the Investor had accepted a total
of 1,852,886 shares of the Company’s common stock in full payment of the February 2017 Notes. On any principal balance owed
by the Company to the Investor, a 6% interest obligation was due quarterly and calculated on a 360 day basis. For the three and
nine months ended September 30, 2017, the Company had interest expense of $42,750 and $173,963 related to the February 2017 Notes
as the final principal balance was converted in August of 2017. In a letter agreement executed on August 27, 2017 (the “Letter
Agreement”), in consideration for the prepayment in the amount of $2,500,000 of the February 2017 Investor Note, which the
Investor subsequently made on August 28, 2017, the Investor and the Company agreed that the Investor would have the right, but
not the obligation, until December 31, 2017, to effect an exchange (the “Share Exchange”) of 841,250 shares of the
Company’s common stock for one or more senior secured convertible promissory notes in the form of the February Additional
Note (the “New Note”), with the right to substitute the alternate conversion price of the New Note with the alternate
conversion price of the Company’s Series B Senior Secured Convertible Note (the “Series B Note”) that was issued
on August 16, 2017. Any New Note issued would be in the principal amount equal to the product of the prepayment amount ($2,500,000)
multiplied by a fraction, the numerator of which is the number of the aggregate shares being tendered to the Company in the Share
Exchange and the denominator of which is 841,250. The maturity date of any New Note will be 45 days following the issuance of the
New Note, and the conversion price of the New Notes will be $4.50 or, at the election of the Investor, the Investor may convert
at the Alternate Conversion Price. The Alternate Conversion Price is defined as either (A) the lower of (i) $4.50 and (ii) the
greater of (I) $4.00 and (II) 85% of the quotient of (x) the sum of the volume weighted average price of the common stock for each
of the 5 consecutive trading days ending on the trading day immediately preceding the delivery of the Conversion Notice, divided
by (y) 5 or (B) that price which shall be the lowest of (i) $3.00 and (ii) the greater of (I) the Floor Price then in effect and
(II) 85% of the quotient of (x) the sum of the volume weighted average price of the Company’s common stock for each of the
5 consecutive trading days ending and including the date of the alternate conversion, divided by (y) 5. The Floor Price is defined
as $3.00 through October 4, 2017 and $0.50 following October 4, 2017.
On August 16, 2017, the Company
issued three Senior Secured Convertible Notes (the “August 2017 Notes”) in the aggregate principal amount of $10,300,000
and a 5-year warrant for the purchase of 1,892,972 shares of the Company’s common stock at an exercise price of $3.25 per
share (the “Investor Warrant”) to the Investor for consideration consisting of a secured promissory note payable by
the Investor to the Company (the “August 2017 Investor Note”) in the principal amount of $8,800,000 and $220,000 in
cash to aid in the funding of the acquisition of the MoviePass Shares. The August 2017 Notes have a maturity date of April 16,
2018 and the Investor Warrant will expire on April 16, 2022. At any time the Investor may and, so long as certain equity conditions
are met, the Company may require the Investor to, convert the August 2017 Notes into shares of the Company’s common stock
(a “Mandatory Conversion”). At September 30, 2017, the contracted conversion prices for the August 2017 Notes, which
include an Initial Series A Note, an Additional Series A Note and the Series B Note, were $4.00 for the Initial Series A Note
and the Additional Series A Note and $3.00 for the Series B Note. In the event of a Mandatory Conversion, the conversion will
be made at the Mandatory Conversion Price which 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% of the sum of (A) the volume weighted average price of
the common stock for each of the 3 trading days with the lowest volume weighted average price 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. As of September 30, 2017, the Investor had paid $1,830,000 of the August 2017 Investor Note with the balance of the principal
amount payable in full to the Company on April 16, 2018. As of September 30, 2017, the unpaid principal amount of the August 2017
Notes owed to the Investor was $6,970,000 which was offset by the same principal amount owed to the Company pursuant to the August
2017 Investor Note. As of September 30, 2017 the Investor had not converted any of the August 2017 Notes into shares of the Company’s
common stock nor had the Investor Warrant been exercised. 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 and nine months ended September 30, 2017, the Company
had $67,875 and $67,875, respectively, of interest expense pertaining to the unpaid principal amount of the August 2017 Notes.
The Investor Warrant
contains anti-dilution provisions. These anti-dilution provisions were triggered when the Company issued the September 2017 Note
in the principal amount of $697,000 to the Investor. Because the September 2017 Note has a conversion price of $3.00 per share,
which is lower than the Investor Warrant per share exercise price of $3.25, the number of shares of the Company’s common
stock issuable to the Investor pursuant to the Investor Warrant was increased from 1,892,972 to 2,050,720 and the per share exercise
price of the Investor Warrant was decreased from $3.25 to $3.00.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Placement Agent Notes and Warrants
The
Company entered into an agreement with a placement agent (the “Placement Agent”) for assistance with the placement
of the September 2016 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 and nine months ended September 30, 2017,
the Company had interest expense pertaining to the September Placement Note in the amount of $0 and $1,200 respectively. 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 September 30, 2017 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 2016 Investor Note. As of December 31, 2016, the Placement Agent had the
right to purchase, pursuant to the terms of the December Placement Agent Warrant, 22,000 shares of the Company’s common
stock at an exercise price of $4.45 per share. Through the first nine months of 2017 the Company has received $4,900,000 of cash
payments for the December Notes, resulting in the issuance of an additional 104,001 warrants at exercise prices of $3.00 per share,
$3.47 per share, $4.00 per share and $6.13 per share. As of September 30, 2017 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 2017 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 2017 Notes
may be converted. Through the first nine months of 2017 the Company received $5,000,000 of cash payments for the February 2017
Notes, resulting in the issuance of an additional 133,334 warrants at an exercise price of $3.00 per share. As of September 30,
2017 the Placement Agent had not purchased any shares from the exercise of the February Placement Agent Warrant.
The Company entered
into an agreement with the Placement Agent for assistance with the placement of the August 2017 Notes and Investor Warrant. The
Placement Agent accepted from the Company a 5-year warrant (the “August Placement Agent Warrant”) as partial payment
for the Placement Agent’s services. The August Placement Agent Warrant allows the purchase of up to 8% of the number of
shares of the Company’s common stock into which the unrestricted principal of the Additional Series A Note and the Series
B Note in the combined principal amount of $9,050,000 becomes convertible at an exercise price equal to the greater of the exercise
price of the August 2017 Notes and the consolidated closing bid price of the Company’s common stock on the date that the
Placement Agent becomes entitled to the warrant. During the period ended September 30, 2017, the Company received $2,050,000 of
cash payments for the August 2017 Notes resulting in the issuance of 42,467 warrants at exercise prices of $3.00 and $6.13 per
share. As of September 30, 2017 the Placement Agent had not purchased any shares from the exercise of the August Placement Agent
Warrants.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
Activity:
Senior
Secured Convertible Notes consist of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
September 2016 notes
|
|
$
|
-
|
|
|
$
|
20,480
|
|
September Placement Agent Note
|
|
|
-
|
|
|
|
902
|
|
December 2016 notes
|
|
|
-
|
|
|
|
10,043
|
|
February 2017 notes
|
|
|
-
|
|
|
|
-
|
|
August 2017 notes
|
|
|
335,215
|
|
|
|
-
|
|
February 2017 notes
|
|
|
46,029
|
|
|
|
-
|
|
Balance at period end
|
|
$
|
381,244
|
|
|
$
|
31,425
|
|
Under
ASC 210-20-45-1, management offset the Notes by the Investor Notes yet to be funded.
The
carrying value of the Senior Secured Convertible Notes is comprised of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
September 2016 notes
|
|
$
|
-
|
|
|
$
|
332,000
|
|
September Placement Agent Note
|
|
|
-
|
|
|
|
80,000
|
|
December 2016 notes
|
|
|
-
|
|
|
|
1,820,000
|
|
February 2017 notes
|
|
|
-
|
|
|
|
-
|
|
August 2017 Notes
|
|
|
3,330,000
|
|
|
|
|
|
September 2017 Notes
|
|
|
697,000
|
|
|
|
|
|
Unamortized discounts
|
|
|
(3,645,756
|
)
|
|
|
(2,200,575
|
)
|
Carrying value
|
|
$
|
381,244
|
|
|
$
|
31,425
|
|
During the three and nine months ended September 30, 2017, the Investor converted a total of $6,066,818
and $12,723,818 in principal and $55,569 and $106,178 in interest into 2,185,663 and 3,862,623 shares of the Company’s common
stock.
On October 6, 2017 the
Company received a prepayment of the August 2017 Investor Note in the amount of $6,970,000.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
14. 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 September 30, 2017 and December 31, 2016:
|
|
|
|
|
Fair Value Measurement
Using Level 3
Inputs Total
|
|
|
|
Amount at
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - warrants
|
|
$
|
4,167,887
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,167,887
|
|
Derivative liability – conversion feature
|
|
|
10,335,845
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,335,845
|
|
Warrant liability
|
|
|
24,119,148
|
|
|
|
|
|
|
|
|
|
|
|
24,119,148
|
|
Total
|
|
$
|
38,622,880
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,622,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability - warrants
|
|
$
|
230,663
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
230,663
|
|
Derivative liability – conversion feature
|
|
|
977,129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
977,129
|
|
Warrant liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
1,207,792
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,207,792
|
|
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 nine months ended September
30, 2017:
|
|
Amount
|
|
Balance at December 31, 2016
|
|
$
|
1,207,792
|
|
Purchases, issuances and settlements
|
|
|
14,626,338
|
|
Conversions to paid in capital
|
|
|
(4,674,682
|
)
|
Extinguishment of December Convertible Note
|
|
|
(9,890
|
)
|
Change in fair value of warrant liabilities
|
|
|
17,038,711
|
|
Change in fair value of derivative liabilities
|
|
|
10,434,611
|
|
Balance at September 30, 2017
|
|
$
|
38,662,880
|
|
The
fair value of the derivative conversion features and warrant liabilities as of September 30, 2017 and December 31, 2016 were calculated
using a Monte-Carlo option model valued with the following weighted average assumptions:
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
Amount
|
|
Amount
|
|
Dividend Yield
|
|
|
|
|
0%
|
|
|
|
|
|
|
0%
|
|
|
|
Expected Volatility
|
|
50%
|
|
|
-
|
|
270%
|
|
154%
|
|
|
-
|
|
230%
|
|
Risk free interest rate
|
|
0.96%
|
|
|
-
|
|
1.92%
|
|
0.82%
|
|
|
-
|
|
1.12%
|
|
Contractual term (in years)
|
|
0.05
|
|
|
-
|
|
5.00
|
|
0.67
|
|
|
-
|
|
5.00
|
|
Exercise price
|
|
$3.00
|
|
|
-
|
|
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 or in the volatility assumptions would result in a higher (lower) fair value measurement.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
15. 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. 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.
In conjunction with the merger with Zone, the Company’s Board of Directors agreed to approve and adopt an amendment to the
2014 Plan to increase the number of shares available for issuance pursuant to awards made from the 2014 Plan to no more than 15%
of the Company’s common stock on a fully diluted basis immediately following the merger. The Board of Directors adopted
the amendment on August 10, 2017 reserving a total of 1,125,000 shares of common stock for issuance from the 2014 Plan. Of that
number, a total of 885,000 shares of common stock remain available for issuance.
Through the date of filing
this Form 10-Q, several awards have been granted outside of the 2014 Plan to third-party consultants in exchange for services
rendered in the amount of $1,409,915, which is recorded as part of Selling, General and Administrative expenses on the Company’s
Statements of Operations for the nine months ended September 30, 2017.
16. Concentration of Credit Risk
As
of September 30, 2017 and December 31, 2016, 6 customers accounted for 88% and 3 customers accounted for 61% of the Company’s
total accounts receivable, respectively.
During
the nine months ended September 30, 2017 and 2016, 82%, and 83.0% of the Company’s revenues were earned from 3 customers
and 3 customers, respectively.
As
of September 30, 2017 and December 31, 2016, 2 vendors accounted for 45% and 3 vendors accounted for 82% of the Company’s
accounts payable, respectively.
17. Commitments and Contingencies
The
Company’s commitments at September 30, 2017 are comprised of the following:
Operating
Lease Commitments
(1)
|
|
Payments due by period
|
|
Less than 1 year
|
|
$
|
73,503
|
|
1 to 3 years
|
|
|
844,174
|
|
3 to 5 years
|
|
|
347,985
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
1,265,662
|
|
(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.
|
In addition, the Company’s
Indian subsidiary had an office in Bangalore, India at a leased facility located at 3rd Floor, Beta Block, Number 7 Sigma Tech
Park, Varthur Kodi, Bangalore 560066. This lease was amended on September 26, 2017 to extend the duration of the lease until September 30, 2019.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 was $81,051, and $50,264 for the three months ended September 30, 2017
and 2016, respectively, and $215,068 and $196,049 for the nine months ended September 30, 2017 and 2016, respectively.
In April 2017, Zone signed
a three-year lease agreement for office space in Miami. The lease term began in May 2017 and requires monthly rent payments of
$5,026 for the first 12 months, $5,177 for the next 12 months, and $5,332 for the last 12 months of the lease.
As
of September 30, 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 $3,000,000 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.
18. 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,
and management and operation of the ODCs for the Company. The Company furnished HMIT with a security deposit of $2,000,000 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 and nine months ended September 30, 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.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company determined to provide for a reserve in its September 30, 2015 and December 31, 2015 financial statements in the amount
of $2,300,000 (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 $2,300,000 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, the Company had
a receivable due from Maruthi in the amount of $75,338 and during 2015 the Company billed an additional $223,454 to Maruthi for
services rendered. The Company provided no services to Maruthi during the year ended December 31, 2016. During 2015, the Company
received $237,318 in payments from Maruthi. Therefore, the amounts receivable at September 30, 2017 and December 31, 2016 were
approximately $61,474 and $61,474, respectively.
19. Warrants
The
following is a summary of the Company’s warrant activity during the nine months ending September 30, 2017:
|
|
Warrant Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life Years
|
|
Outstanding/exercisable – December 31, 2016
|
|
|
70,714
|
|
|
$
|
6.26
|
|
|
|
4.87
|
|
Granted
|
|
|
2,172,774
|
|
|
|
3.31
|
|
|
|
4.85
|
|
Shares issued from anti-dilutive events
|
|
|
157,748
|
|
|
|
3.00
|
|
|
|
4.90
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding/exercisable – September 30, 2017
|
|
|
2,401,236
|
|
|
$
|
3.40
|
|
|
|
4.85
|
|
20. 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 and nine months ended September 30, 2016, the
Company only operated in the consulting segment.
HELIOS
AND MATHESON ANALYTICS INC
.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
The
Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes the
Company’s segment information for the nine months ended September 30, 2017 and 2016 as well as for the balance sheet dates
presented:
|
|
For the Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Consulting
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,672,036
|
|
|
$
|
5,608,145
|
|
Cost of Revenue
|
|
|
2,969,357
|
|
|
|
3,922,469
|
|
Gross Margin
|
|
|
702,679
|
|
|
|
1,685,676
|
|
Total operating expenses
|
|
|
6,280,032
|
|
|
|
2,083,366
|
|
Loss from operations
|
|
|
(5,577,353
|
)
|
|
|
(397,690
|
)
|
Total other expense
|
|
|
(44,914,576
|
)
|
|
|
(763,388
|
)
|
Provision for income taxes
|
|
|
39,110
|
|
|
|
37,247
|
|
Total net loss
|
|
$
|
(50,531,039
|
)
|
|
$
|
(1,198,325
|
)
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of Revenue
|
|
|
-
|
|
|
|
-
|
|
Gross Margin
|
|
|
-
|
|
|
|
-
|
|
Total operating expenses
|
|
|
4,601,330
|
|
|
|
|
|
Loss from operations
|
|
|
(4,601,330
|
)
|
|
|
-
|
|
Total other expense
|
|
|
(47,220
|
)
|
|
|
-
|
|
Provision for income taxes
|
|
|
-
|
|
|
|
-
|
|
Total net loss
|
|
$
|
(4,648,550
|
)
|
|
$
|
-
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Consulting
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
394,172
|
|
|
$
|
1,095,732
|
|
Accounts receivable
|
|
$
|
254,930
|
|
|
$
|
410,106
|
|
Unbilled receivables
|
|
$
|
48,595
|
|
|
$
|
45,207
|
|
Prepaid expenses and other current assets
|
|
$
|
696,003
|
|
|
$
|
554,338
|
|
Property and equipment
|
|
$
|
38,454
|
|
|
$
|
34,368
|
|
Deposits and other assets
|
|
$
|
128,960
|
|
|
$
|
59,189
|
|
Accounts payable and accrued expenses
|
|
$
|
1,606,733
|
|
|
$
|
1,196,668
|
|
|
|
|
|
|
|
|
|
|
Technology
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,269,707
|
|
|
$
|
1,651,508
|
|
Prepaid expenses and other current assets
|
|
$
|
11,865
|
|
|
$
|
42,833
|
|
Property and equipment
|
|
$
|
96,251
|
|
|
$
|
10,844
|
|
Intangible assets
|
|
$
|
4,915,816
|
|
|
$
|
6,004,691
|
|
Goodwill
|
|
$
|
4,599,969
|
|
|
$
|
4,599,969
|
|
Deposits and other assets
|
|
$
|
10,052
|
|
|
$
|
-
|
|
Accounts payable and accrued expenses
|
|
$
|
932,285
|
|
|
$
|
134,450
|
|
HELIOS AND MATHESON ANALYTICS INC
.
Notes to Condensed Consolidated Financial
Statements
(Unaudited)
21. Subsequent Events
Transactions with MoviePass
See Note 4 for a discussion
relating to transactions with MoviePass that occurred after September 30, 2017.
On each of November 2, 2017 and November 7, 2017, the Company exercised a portion of the MoviePass Option
for an aggregate purchase price of $750,000 and $3,000,000, respectively. In connection with the option exercises, MoviePass issued
to the Company subordinated convertible promissory notes in the principal amount of $750,000 and $3,000,000, respectively.
Share Exchange Conversion
and Amendment to the Agreement
On October 13, 2017,
pursuant to the Letter Agreement executed by the Company and the Investor on August 27, 2017, the Investor converted 100,000 shares
of the Company’s common stock for a New Note (the “New February 2017 Exchange Note”) in the principal amount
of $300,000. The New February 2017 Exchange Note had a maturity date of November 27, 2017.
On October 23, 2017, the Company and the Investor entered into a Third Amendment and Exchange Agreement
(the “Exchange Agreement”). Pursuant to the Exchange Agreement, the Investor exchanged the New February 2017 Exchange
Note for 947,218 shares of the Company’s common stock and for rights to receive 552,782 additional shares of common stock
(collectively, the “Exchange Securities”) subject to a beneficial ownership limitation of 9.9% and limitations under
Nasdaq Listing Rule 5635(d). In exchange for the Exchange Securities, the Investor agreed to, among other things: (i) terminate
the Investor’s right to receive any further New Notes, which would have had a principal amount up to $2.2 million and a $0.50
conversion price floor if issued; (ii) (A) release all security interests held by the Investor in the Company’s assets and
those of the Company’s subsidiaries, including Zone and its proprietary RedZone Map™ product (“RedZone”)
and the Company’s interest in MoviePass (collectively, the “Collateral”), (B) terminate each security agreement
between the Company and the Investor, and (C) authorize the Company to file amendments to all UCC Financing Statements for the
purpose of terminating the Investor’s security interests in the Collateral; (iii) permit the Company to obtain non-convertible
senior secured debt financing from a qualified bank in an amount not less than $20 million and not more than $100 million while
the Convertible Notes remain outstanding; (iv) defer the Company’s obligation to pay any interest under the August 2017 Notes
until the earlier to occur of (x) each conversion of the August 2017 Notes, solely with respect to the portion of interest included
in the applicable conversion amount, (y) each redemption of the August 2017 Notes, solely with respect to the portion of interest
included in the applicable redemption amount, and (z) the maturity date of the August 2017 Notes; and (v) waive any and all Events
of Default (as defined in the August 2017 Notes) prior to October 23, 2017.
Consulting
Agreement
On October 5, 2017 the Company entered into a consulting agreement (the “Consulting Agreement”)
with Mr. Muralikrishna Gadiyaram, a member of the Company’s Board of Directors. The Consulting Agreement formalizes the consulting
arrangement between the Company and Mr. Gadiyaram, for which the Company has been accruing consulting fees since January 1, 2017.
In exchange for his services, Mr. Gadiyaram will receive fees in the amount of $18,750 per month in cash and, upon execution of
the Consulting Agreement, all accrued consulting fees payable to Mr. Gadiyaram became due. The Consulting Agreement has a term
of two years but may be terminated by either party at any time by giving 30 days written notice to the other party. If the Company
elects to terminate the Consulting Agreement without cause prior to the end of the term, Mr. Gadiyaram will be entitled to a termination
fee equal to the lesser of (a) the consulting fee for the remainder of the term, or (b) the consulting fee for a period of 12 months
following the delivery of written notice of termination.
Issuance of Demand
Note
On November 2, 2017, the Company issued a demand promissory note in the principal amount of $750,000 (the
“Demand Note”) to the Investor. The proceeds from the Demand Note were used to exercise a portion of the MoviePass
Option.
Issuance of New Series
of Senior Convertible Notes
On November 7, 2017
(the “Closing Date”), the Company completed an offering of a new series of senior convertible notes in the
aggregate principal amount of $100,000,000 to certain institutional investors. A portion of the proceeds from this offering
was used to pay the Demand Note and the remaining proceeds may be used by the Company in connection with exercising the
Company’s rights pursuant to the MoviePass Option Agreement or any other transaction whereby the Company increases its
ownership interests or other rights and interests in MoviePass. On the Closing Date, the Company received $5,000,000 in
proceeds from the sale of the senior convertible notes.