UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): November 30, 2017

 

HELIOS AND MATHESON ANALYTICS INC.

(Exact name of Registrant as specified in charter)

 

Delaware

  0-22945   13-3169913
(State or other jurisdiction
of incorporation)
  (Commission File Number)   (IRS Employer
Identification Number)

 

Empire State Building

350 5 th Avenue

New York, New York 10118

(Address of principal executive offices)

 

Registrant’s telephone number, including area code: (212) 979-8228

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions (see General Instruction A.2 below).

 

☐    Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
     
☒    Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR240.14a-12)
     
☐    Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)).
     
☐    Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13(e)-4(c))

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

 

 

 

 

 

Item 8.01 Other Events.

 

As previously reported in its Current Report on Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on August 15, 2017 (the “Original Report”), Helios and Matheson Analytics Inc. (the “Company” or “HMNY”) disclosed its agreement to acquire a majority stake in MoviePass Inc. (“MoviePass”) pursuant to a Securities Purchase Agreement (the “MoviePass SPA”) entered into on the same date (the “MoviePass Transaction”). As previously reported in its Current Report on Form 8-K filed with the Commission on October 11, 2017 (the “Additional Report”), the Company and MoviePass entered into an Amendment No. 1 to the MoviePass SPA on October 6, 2017. The MoviePass Transaction has not yet been completed and the issuance of shares of common stock of the Company to MoviePass pursuant to the MoviePass SPA remains subject to approval by the Company’s stockholders in accordance with Nasdaq Listing Rule 5635. 

 

This Current Report on Form 8-K provides audited and interim financial statements of MoviePass and pro forma financial statements of the Company giving effect to the MoviePass Transaction.

 

This Current Report on Form 8-K should be read in conjunction with the Original Report and the Additional Report, which provide a more complete description of the MoviePass SPA (as amended) and the MoviePass Transaction.

 

Item 9.01 Financial Statements and Exhibits.

 

Exhibit No.   Description
     
99.1   Audited Financial Statements of MoviePass Inc. as of December 31, 2016 and December 31, 2015 and for the years then ended
99.2   Unaudited Financial Statements of MoviePass Inc. as of September 30, 2017 and for the nine months ended September 30, 2017 and September 30, 2016
99.3   Unaudited Pro Forma Combined Financial Statements of Helios and Matheson Analytics Inc. and MoviePass Inc.

 

Cautionary Statement on Forward-looking Information

 

Certain information in this communication contains “forward-looking statements” about HMNY and MoviePass within the meaning of the Private Securities Litigation Reform Act of 1995 or under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (collectively, “forward-looking statements”), that may not be based on historical fact, but instead relate to future events. Forward-looking statements are generally identified by words such as “projects,” “may,” “will,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “potential” or similar expressions. Such forward-looking statements include, without limitation, statements regarding (i) the expected completion of the MoviePass Transaction, (ii) the time frame in which the MoviePass Transaction is expected to occur, (iii) the expected benefits to HMNY and MoviePass from completing the MoviePass Transaction and (iv) MoviePass’ business. Statements regarding future events are based on the parties’ current expectations and are necessarily subject to associated risks related to, among other things, the conditions to the closing of the MoviePass Transaction may not be satisfied, the occurrence of any event, change or other circumstances that could give rise to the termination of the acquisition agreement between MoviePass and HMNY, MoviePass’ and HMNY’s continuing need for additional financing, and general economic conditions. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.

 

Such forward-looking statements are based on a number of assumptions. Although management of HMNY and MoviePass believe that the assumptions made and expectations represented by such statements are reasonable, there can be no assurance that a forward-looking statement contained herein will prove to be accurate. Actual results and developments may differ materially and adversely from those expressed or implied by the forward-looking statements contained herein and even if such actual results and developments are realized or substantially realized, there can be no assurance that they will have the expected consequences or effects.

 

  2  

 

 

Risk factors and other material information concerning HMNY and MoviePass are described in HMNY’s Quarterly Report on Form 10-Q filed with the U.S. Securities and Commission (the “SEC”) on November 14, 2017, in HMNY’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and other HMNY filings, including subsequent current and periodic reports, information statements and registration statements filed with the SEC. You are cautioned to review such reports and other filings at www.sec.gov.

 

Given these risks, uncertainties and factors, you are cautioned not to place undue reliance on such forward-looking statements and information, which are qualified in their entirety by this cautionary statement. All forward-looking statements and information made herein are based on HMNY’s and MoviePass’ current expectations and HMNY does not undertake an obligation to revise or update such forward-looking statements and information to reflect subsequent events or circumstances, except as required by law.

 

In particular, MoviePass’ $9.95 per month subscription pricing models is new. There can be no assurance that the resulting rate of increase in its subscribers from the previously announced $9.95 per month pricing model will continue or be sustained. Also, MoviePass has previously offered a one year subscription pricing model and may offer similar pricing models in the future. There can be no assurance that any rate of increase in its subscribers will result from new pricing models, and even if such an increase is achieved, that it will be sustained. Moreover, an increase in the number of MoviePass™ subscribers provides no assurance that the MoviePass™ business model will lead to profitability.

 

Additional Information for Stockholders of HMNY about the Proposed Transaction between HMNY and MoviePass and Where to Find It

 

HMNY plans to file with the SEC and furnish its stockholders with a proxy statement in connection with the proposed transaction with MoviePass and security holders of HMNY are urged to read the proxy statement and the other relevant materials when they become available because such materials will contain important information about HMNY, MoviePass and their respective affiliates and the proposed transaction. The proxy statement and other relevant materials (when they become available), and any and all other documents filed by HMNY with the SEC, may be obtained free of charge at the SEC’s website at www.sec.gov.

 

In addition, investors may obtain a free copy of HMNY’s filings from HMNY’s website at www.hmny.com or by directing a request to: Helios and Matheson Analytics Inc., Attn: Secretary, Empire State Building, 350 Fifth Avenue, Suite 7520, New York, New York 10118, (212) 979-8228.

 

INVESTORS AND SECURITY HOLDERS OF HMNY ARE URGED TO READ THE PROXY STATEMENT AND THE OTHER RELEVANT MATERIALS WHEN THEY BECOME AVAILABLE BEFORE MAKING ANY VOTING OR INVESTMENT DECISION WITH RESPECT TO THE PROPOSED TRANSACTION BETWEEN HMNY AND MOVIEPASS.

 

Participants in the Solicitation

 

HMNY and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the security holders of HMNY in connection with the proposed transaction between HMNY and MoviePass. Information about those directors and executive officers of HMNY, including their ownership of HMNY securities, is set forth in its annual report on Form 10-K for the year ended December 31, 2016, which HMNY filed with the SEC on April 14, 2017, and its definitive proxy statement on Schedule 14A filed with the SEC on October 3, 2017. Investors and security holders may obtain additional information regarding the direct and indirect interests of HMNY and its directors and executive officers in the proposed transaction by reading the proxy statement and other public filings referred to above.

 

  3  

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Date: November 30, 2017

 

  HELIOS AND MATHESON ANALYTICS INC.
     
  By: /s/ Stuart Benson
    Stuart Benson,
Chief Financial Officer

 

  4  

 

 

EXHIBIT INDEX

 

Exhibit No.   Description
     
99.1   Audited Financial Statements of MoviePass Inc. as of December 31, 2016 and December 31, 2015
99.2   Unaudited Financial Statements of MoviePass Inc. as of September 30, 2017 and for the nine months ended September 30, 2017 and September 30, 2016
99.3   Unaudited Pro Forma Combined Financial Statements of Helios and Matheson Analytics Inc. and MoviePass Inc.

 

 

5

 

Exhibit 99.1

 

MoviePass, Inc.

 

INDEX TO THE FINANCIAL STATEMENTS

 

Independent Auditors’ Report 1
Balance Sheets as of December 31, 2016 and 2015 2
Statements of Operations for the years ended December 31, 2016 and 2015 3
Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2016 and 2015 4
Statements of Cash Flows for the years ended December 31, 2016 and 2015 5
Notes to Financial Statements 6

 

 

 

 

INDEPENDENT AUDITORS’ REPORT

 

To the Board of Directors and Stockholders of

MoviePass, Inc.

 

Report on the Financial Statements

 

We have audited the accompanying financial statements of MoviePass, Inc. (the “Company”), which comprise the balance sheets as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

 

Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

 

Our responsibility is to express an opinion on these financial statements based on our audit s . We conducted our audit s in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit s to obtain reasonable assurance about whether the financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of MoviePass, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

 

Emphasis of Matter

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred operating losses from operations and negative cash flows that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our op inion is not modified with respect to this matter.

 

/s/ EISNERAMPER LLP

 

New York, New York

November 29, 2017

 

  1  

 

 

MoviePass Inc.

Balance Sheets

 

   

December 31,

2016

   

December 31,

2015

 
Assets            
Current Assets:            
Cash   $ 158,744     $ 82,234  
Accounts receivable, net     55,780       50,071  
Prepaid expenses     7,168       36,855  
Total Current Assets     221,692       169,160  
Property and equipment, net     118,317       264,337  
Other assets     8,000       8,000  
Domain names     25,965       25,965  
Total Assets   $ 373,974     $ 467,462  
Liabilities and Stockholders' Equity (Deficit)                
Current Liabilities:                
Accounts payable   $ 521,251     $ 507,890  
Accrued expenses     513,815       249,466  
Accrued interest     442,650       118,207  
Gift card liabilities     79,058       146,473  
Deferred revenue     302,656       324,942  
Warrant liability     246,697       -  
Convertible notes payable-current portion     702,665       -  
Total Current Liabilities     2,808,792       1,346,978  
Convertible notes payable     7,467,516       4,243,663  
Total Liabilities     10,276,308       5,590,641  
                 
Stockholders' Equity (Deficit):                
Preferred stock series seed, par value $0.0001, 4,510,741 shares authorized, 4,510,741 shares issued and outstanding at December 31, 2016 and 2015     451       451  
Preferred stock series seed-1, par value $0.0001, 486,666 shares authorized, 486,666 shares issued and outstanding at December 31, 2016 and 2015     49       49  
Preferred stock series A, par value $0.0001, 7,632,239 shares authorized, 4,986,736 shares issued and outstanding at December 31, 2016 and 2015     499       499  
Preferred stock series A-1, par value $0.0001, 29,123,721 shares authorized, 11,489,356 shares issued and outstanding at December 31, 2016 and 2015     1,149       1,149  
Common stock, par value $0.0001, 103,000,000 and 60,000,000 shares authorized, 10,125,567 and 10,105,567 shares issued and outstanding at December 31, 2016 and 2015, respectively     1,013       1,011  
Additional paid-in capital     9,029,996       8,892,788  
Accumulated deficit     (18,935,491 )     (14,019,126 )
Total Stockholders' Equity (Deficit)     (9,902,334 )     (5,123,179 )
Total Liabilities and Stockholders' Equity (Deficit)   $ 373,974     $ 467,462  

 

The accompanying notes are an integral part of these financial statements.

 

  2  

 

 

MoviePass Inc.

Statements of Operations

 

    Years ended December 31,  
    2016     2015  
             
Subscription revenues   $ 8,692,337     $ 6,748,001  
Other revenues     20,212       64,709  
Total revenues     8,712,549       6,812,710  
                 
Subscription cost of revenues     9,780,214       6,823,906  
Other cost of revenues     1,506       1,984  
Total cost of revenues     9,781,720       6,825,890  
Gross loss     (1,069,171 )     (13,180 )
Operating expenses:                
Payroll     1,160,637       1,072,897  
Professional fees     517,248       205,143  
General and administrative expenses     1,638,005       1,282,760  
Sales and marketing     205,406       1,405,539  
Depreciation and amortization     148,113       238,079  
Total operating expenses     3,669,409       4,204,418  
                 
Loss from operations     (4,738,580 )     (4,217,598 )
                 
Other income (expense):                
Interest expense     (324,443 )     (115,080 )
Change in fair value of convertible notes     148,482       58,886  
Change in fair value of warrant liability     (1,824 )     -  
Total other expense, net     (177,785 )     (56,194 )
                 
Loss before provision for income taxes     (4,916,365 )     (4,273,792 )
                 
Provision for income taxes     -       -  
Net loss   $ (4,916,365 )   $ (4,273,792 )

 

The accompanying notes are an integra l part of these financial statements.

 

  3  

 

 

MoviePass Inc.

Statement of Stockholders’ Equity (Deficit)

 

    Preferred Stock - Series Seed     Preferred Stock - Series Seed-1     Preferred Stock - Series A     Preferred Stock - Series A-1     Common Stock     Additional
Paid-In
    Accumulated     Total Stockholders'
Equity
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital   D eficit   (Deficit)  
Balance at January 1, 2015     4,510,741     $ 451       486,666     $ 49       4,986,736     $ 499       11,489,356     $ 1,149       10,089,734     $ 1,009     $ 8,856,518     $ (9,745,334 )   $ (885,659 )
Stock option expense     -       -       -       -       -       -       -       -       -       -       35,511       -       35,511  
Shares issued for excercises of options     -       -       -       -       -       -       -       -       15,833       2       759       -       761  
Net loss     -       -       -       -       -       -       -       -       -       -       -       (4,273,792 )     (4,273,792 )
Balance at December 31, 2015     4,510,741       451       486,666       49       4,986,736       499       11,489,356       1,149       10,105,567       1,011       8,892,788       (14,019,126 )     (5,123,179 )
Stock option expense     -       -       -       -       -       -       -       -       -       -       136,250       -       136,250  
Shares issued for excercises of options     -       -       -       -       -       -       -       -       20,000       2       958       -       960  
Net loss     -       -       -       -       -       -       -       -       -       -       -       (4,916,365 )     (4,916,365 )
Balance at December 31, 2016     4,510,741     $ 451       486,666     $ 49       4,986,736     $ 499       11,489,356     $ 1,149       10,125,567     $ 1,013     $ 9,029,996     $ (18,935,491 )   $ (9,902,334 )

 

The accompanying notes are an integral part of these financial statements.

 

  4  

 

 

MoviePass Inc.

Statements of Cash Flows

 

    Years ended December 31,  
    2016     2015  
Cash flows from operating activities:            
Net loss   $ (4,916,365 )   $ (4,273,792 )
Adjustments to reconcile from net loss to net cash used in operating activities:                
Depreciation and amortization     148,114       238,079  
Stock options expense     136,250       35,511  
Loss on issuance of warrants     244,873       -  
Change in fair value of convertible notes     (148,482 )     (58,886 )
Change in fair value of warrant liability     1,824       -  
Changes in operating assets and liabilities                
Accounts receivable, net     (5,709 )     (23,393 )
Prepaid expenses     29,687       34,797  
Other current assets     -       -  
Other assets     -       2,880  
Accounts payable     13,361       128,441  
Accrued expenses     264,349       148,775  
Accrued interest     324,443       115,080  
Gift card liabilities     (67,415 )     92,448  
Deferred revenue     (22,286 )     134,968  
Net cash used in operating activities     (3,997,356 )     (3,425,092 )
                 
Cash flows from investing activities:                
Purchases of property and equipment     (2,094 )     (179,886 )
Net cash used in investing activities     (2,094 )     (179,886 )
                 
Cash flows from financing activities:                
Proceeds from issuance of convertible notes     4,075,000       3,576,480  
Proceeds from stock option excercises     960       761  
Net cash provided by financing activities     4,075,960       3,577,241  
                 
Net increase (decrease) in cash     76,510       (27,737 )
Cash, beginning of year     82,234       92,843  
Cash, end of year   $ 158,744     $ 65,106  
                 
Supplemental disclosure of cash flow information:                
Cash paid during the year for:                
Interest   $ -     $ -  
Income taxes   $ -     $ -  

 

The accompanying notes are an integral part of these financial statements.

 

  5  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Note 1 - Organization and Nature of Business

 

MoviePass, Inc. (MoviePass” or the “Company”), is a Delaware corporation formed in 2011, is a theatrical movie subscription service which allows subscribers to attend a movie a day for a fixed monthly fee. The Company’s service is available in a majority of theaters throughout the United States.

 

Note 2 – Liquidity

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. The Company has a history of recurring losses from operations and use of cash in operating activities while in the process of developing its business. For the years ended December 31, 2016 and 2015, the Company’s loss from operations was $4,738,580 and $4,217,598 and cash used in operating activities was $3,997,356 and $3,407,964, respectively. Additionally, as of December 31, 2016 and 2015, the Company had negative working capital of $2,587,100 and $1,177,818, respectively. 

 

Management believes that in order for the Company to meet its obligations arising from normal business operations through November 30, 2018 that the Company requires (i) additional capital either in the form of equity or debt and/or (ii) additional sales of its subscription services that will generate sufficient operating profit and cash flows to fund operations.  Without additional capital or additional sales of its services, the Company’s ability to continue to operate will be limited. If the Company is unable to obtain adequate capital, it could be forced to cease or reduce its operations. The Company is currently pursuing capital transactions in the form of debt and equity (see Note 12), however, management cannot provide any assurance that the Company will be successful in its plans. These financial statements do not include any adjustments to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should the Company not be able to continue as a going concern.

 

Note 3 – Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

 

Revenue Recognition

 

Revenue is principally derived from subscription services. The Company recognizes revenue, net of sales discounts, when: (1) persuasive evidence of an arrangement exists with the customer reflecting the terms and conditions under which products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. For all revenue transactions, the Company considers customer registration, payment, or third party acknowledgment to be persuasive evidence of an arrangement. Cost of revenue consists of the cost of the purchased goods related to the corresponding sales transaction. Subscription revenue is recognized ratably on a straight-line basis over the duration of the subscription period.

 

  6  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Deferred Revenue

 

Deferred revenue consists of prepaid but unrecognized subscription revenue received in advance of the completion of the delivery of services. The Company classifies deferred revenue as short-term when the subscription period is less than one year and as long-term when the subscription period is greater than one year.

 

Domain Names

 

Domain names are deemed to have an indefinite useful life based primarily on the Company’s plans for continued indefinite use, are not amortized, but are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test for indefinite-lived domain names consists of a comparison of their fair value with their carrying amount.

 

Software Development Costs

 

Property, plant and equipment mainly consists of costs incurred to develop software. Costs incurred in developing the software are charged to expense until technological feasibility has been established. Once technological feasibility is established, all software costs are capitalized and amortized on a straight-line basis over the software’s estimated useful life, which is generally three years. Maintenance and training costs are charged to expense as incurred.

 

Impairment of Long-Lived Assets

 

The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. Management believes that there was no impairment of long-lived assets as of and for the years ended December 31, 2016 and 2015. There can be no assurance, however, that market conditions or demand for the Company’s products or services will not change which could result in long-lived asset impairment charges in the future.

 

Gift Card liabilities

 

The Company sells gift cards on its website in customizable denominations. Once purchased, these gift cards can be freely transferred and remain a liability until the holder redeems the balance for monthly subscription fees by either creating a new account or using the balance to apply funds to an already existing account.

 

Derivative Financial Instruments

 

The Company accounts for warrants issued in conjunction with debt in accordance with the guidance contained in ASC Topic 815, Derivatives and Hedging. For warrant instruments that are not deemed to be indexed to the Company’s own stock, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. The liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statements of operations. The fair value of the Company’s warrant liability was based upon the intrinsic value of the warrant multiplied by the probability of a future capital raise using a Monte Carlo simulation valuation methodology.

 

Fair Value of Financial Instruments

 

The Company utilizes ASC 820-10, Fair Value Measurement and Disclosure , for valuing financial assets and liabilities measured on a recurring basis. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1. Observable inputs such as quoted prices in active markets;

 

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

  7  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

The table below describes the Company’s valuation of financial instruments using guidance from ASC 820-10:

 

   

Fair Value Measurements Using:

 
    Level 1     Level 2     Level 3  
As of December 31, 2016                  
Current liabilities:                  
Convertible notes   $ -     $ -     $ 702,665  
Warrant liability   $ -     $ -     $ 246,697  
Non-current liabilities:                        
Convertible notes   $ -     $ -     $ 7,467,516  
                         
As of December 31, 2015                        
Non-current liabilities:                        
Convertible notes   $ -     $ -     $ 4,243,663  

 

The Company has valued convertible notes and warrants as level 3 instruments. In addition to volatility, the risk-free rate, the time to maturity, and the discount rate, additional unobservable inputs include the timing of a financing round, which in all cases is assumed to be one year from the valuation date. The notes are valued using a combination of a Monte Carlo simulation and discounted cash flow analysis.  The beneficial conversion feature imbedded in the notes is valued within the Monte Carlo framework by simulating the stock price as of the estimated funding date, and then computing the expected payoff (in excess of the principal & accrued interest at time of conversion) upon conversion. The fair value of the Company’s warrants was based upon the intrinsic value of the warrant multiplied by the probability of a future capital raise using a Monte Carlo simulation valuation methodology

 

The following table reconciles the changes in the fair value of the convertible notes and the warrant liability categorized within Level 3 of the fair value hierarchy for the years ended December 31, 2016 and 2015:

 

    Level 3 Instruments  
    Convertible Notes     Warrants  
Balance at January 1, 2015   $ 726,069     $ -  
Fair value of convertibles notes issued     3,576,480       -  
Change in fair value of convertible notes     (58,886 )     -  
Balance at December 31, 2015     4,243,663       -  
Fair value of convertibles notes issued     4,075,000       -  
Fair value of warrants issued     -       244,873  
Change in fair value of convertible notes     (148,482 )     -  
Change in fair value of warrant liability     -       1,824  
Balance at December 31, 2016   $ 8,170,181     $ 246,697  

 

Stock Based Compensation

 

Stock-based compensation represents the cost related to stock-based awards granted to employees and others. The Company measures stock-based compensation cost to employees at grant date, based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis over the employee requisite service period. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Company elected to early adopt ASU No. 2016-09 Compensation — Stock Compensation to record forfeitures as they occur. Prior to the adoption of this guidance, the Company did not record forfeitures as they were immaterial.

 

For non-employee stock-based compensation, the Company applies FASB ASC Topic 505  Equity-Based Payments to Non-Employees , which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with FASB ASC Topic 718.

 

  8  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Concentrations

 

The Company obtains tickets from multiple theater chains as of December 31, 2016, and is actively engaging more in new markets. For the year ended December 31, 2015, two ticket suppliers made up 65% and 33% of all cost of ticket sales. In 2016 the Company relied upon one supplier for 97% cost of ticket sales. The loss of this ticket supplier would have a material impact on the Company’s revenues

 

Income Taxes

 

The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance against deferred income tax asset will be recorded if, based on the weight of available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized. As of December 31, 2016 and 2015, all of the Company’s net deferred income tax assets were subject to a full valuation allowance.

 

The Company recognizes the impact of an uncertain income tax position in the financial statements if it believes that the position is more likely than not to be sustained by the relevant taxing authority. As of December 31, 2016 and 2015, the Company had no uncertain income tax positions.

 

Recently Issued Accounting Pronouncements

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), Derivatives and Hedging (Topic 815) . The amendments in Part I of this update change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The amendments also clarify existing disclosure requirements for equity-classified instruments. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) no longer would be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. The Company adopted this standard on January 1, 2015 and the adoption did not have an impact its financial statements and related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases , which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 for public companies and December 15, 2019 for private companies with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

 

In November 2015, the FASB issued ASU No. 2015-17,  Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes , which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as noncurrent on the balance sheet. The Company adopted this standard on December 31, 2015. The adoption of this standard had no impact on the Company’s financial statements.

 

In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, the FASB deferred the effective date of this guidance until January 1, 2019 for private companies and January 1, 2018 for public companies and the Company is currently assessing the impact of this guidance on its financial statements.

 

  9  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Note 3 – Other Assets

 

Other Assets consists of a deposit for leased building space. See Note 11 for more information.

 

Note 4 – Property and Equipment

 

Property and equipment is comprised of the following:

 

    December 31, 2016     December 31, 2015  
Computers   $ 2,094     $ -  
Developed software     1,096,992       1,096,992  
Total assets     1,099,086       1,096,992  
Less: accumulated depreciation and amortization     (980,769 )     (832,655 )
Property and equipment, net   $ 118,317     $ 264,337  

 

Depreciation and amortization expense for the years ended December 31, 2016 and 2016 was $148,114 and $238,079, respectively.

 

Note 5 – Accrued Expenses

 

Accrued expenses consist of the following:

 

    December 31,
2016
    December 31,
2015
 
Accrued cost of tickets   $ 329,893     $ 65,135  
Payroll liabilities     21,973       8,128  
Other accrued expenses     161,949       176,203  
Total   $ 513,815     $ 249,466  

 

Note 6 – Convertible Notes Payable

 

Convertible notes payable consists of the following:

 

    December 31, 2016     December 31, 2015  
    Fair Value     Principal Balance     Accrued Interest     Fair Value     Principal Balance     Accrued Interest  
2014 Convertible promissory notes   $ 853,647     $ 744,975     $ 77,727     $ 895,676     $ 744,975     $ 40,376  
2015 Convertible promissory notes     4,690,976       5,151,480       320,046       3,347,987       3,551,480       77,831  
Secured convertible promissory note     275,736       250,000       7,500       -       -       -  
Subordinated convertible notes     2,349,822       2,225,000       37,377       -       -       -  
Total     8,170,181       8,371,455       442,650       4,243,663       4,296,455       118,207  
Less: current portion     702,665       719,975       442,650       -       -       118,207  
Long-term portion   $ 7,467,516     $ 7,651,480     $ -     $ 4,243,663     $ 4,296,455     $ -  

 

2014 Convertible Notes

 

In November and December 2014, the Company issued convertible notes with an aggregate principal value of $744,975. These notes accrue 5% interest and have maturity dates between November and December 2017. The notes are convertible into shares of common stock upon a preferred stock equity raise of greater than $1,000,000 at a price per share equal to that raise, or upon election of the majority of holders based on outstanding value upon a preferred stock equity raise of less than $1,000,000 at the same price per share. Further, the notes may be convertible upon election of the majority of holders based on outstanding value upon a qualified change of control or upon or after the maturity date at an Adjusted Conversion Price equal to $14,000,000 divided by the number of fully diluted common shares.

 

  10  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

2015 Convertible Notes

 

From January 2015 to June 2016, the Company issued convertible notes with an aggregate principal value of $5,151,480. These notes accrue 5% interest and have maturity dates between January 2018 and June 2018. The notes are convertible into shares of common stock upon a preferred stock equity raise of greater than $1,000,000 at a price per share equal to that raise, or upon election of the majority of holders based on outstanding value upon a preferred stock equity raise of less than $1,000,000 at the same price per share. Further, the notes are convertible upon election of the majority of holders based on outstanding value upon a qualified change of control or upon or after the maturity date at an Adjusted Conversion Price equal to $25,000,000 divided by the number of fully diluted common shares.

 

Secured Promissory Convertible Note

 

In May 2016, the Company issued a secured convertible note to an existing lender who is also a director, with a principal value of $250,000 and contingently issuable warrants to purchase the Company’s common stock (see Note 8). This note accrues 5% interest and has maturity date in May 2018. The note is convertible, at the election of the holder, into shares of common stock upon a preferred stock equity raise of greater than $1,000,000 at the lesser of 80% of the price per share of such raise, or an Adjusted Conversion Price equal to $25,000,000 divided by the number of fully diluted common shares.

 

Subordinated Convertible Notes

 

During 2016, the Company issued subordinated convertible notes with an aggregate principal value of $2,225,000. These notes accrue 5% interest and have maturity dates between June 2018 and June 2019. The notes are convertible, at the election of the majority of the holders, based on outstanding value, into shares of common stock upon a preferred stock equity raise of greater than $1,000,000 at the lesser of 80% of the price per share of such raise, or an Adjusted Conversion Price equal to $25,000,000 divided by the number of fully diluted common shares. Through September 30, 2017, the Company issued additional subordinated convertible notes with an aggregate principal value of $3,105,000.

 

Fair Value Option

 

As optional contingent redemption provisions within all of the convertible notes require bifurcation, the Company has elected to recognize and measure all of the convertible notes at fair value, with changes in fair value recognized in earnings, pursuant to the fair value option in ASC 825. For the years ended December 31, 2016 and 2015, the Company recognized a gain on the change in the fair value of the convertible notes of $148,482 and $58,886, respectively.

 

  11  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Note 7 – Stockholders’ Equity

 

Preferred Stock

 

At December 31, 2016 and 2015, the authorized preferred stock of the Company consists of 41,753,367 shares of preferred stock, $0.0001 par value, of which 4,510,741 shares have been designated Series Seed Preferred Stock, 486,666 shares have been designated Series Seed-1 Preferred Stock, 7,632,239 shares have been designated Series A Preferred Stock, and 29,123,721 shares of Series A-1 Preferred Stock.

 

Series Seed Preferred Stock (“Series Seed”)

 

Throughout 2011, the Company entered into a Series Seed Preferred Stock purchase agreement for the sale of Series Seed Preferred Stock of the Company. The Company authorized the issuance and sales of 4,510,741 shares of Series Seed preferred stock, par value $0.0001 per share, at $0.32478 per share, which are convertible into 4,510,741 shares of common stock. The Series Seed is entitled to receive dividends at $0.02598 per share and its liquidation preference is $0.32478 per share.

 

Series Seed-1 Preferred Stock (“Series Seed-1”)

 

Throughout 2011, the Company entered into a Series Seed-1 Preferred Stock purchase agreement for the sale of Series Seed Preferred Stock of the Company. The Company authorized the issuance and sales of 486,666 shares of Series Seed-1 Preferred Stock, par value $0.0001 per share, at $0.5349 per share, which are convertible into 486,666 shares of common stock. The Series Seed-1 is entitled to receive dividends at $0.04279 per share and its liquidation preference is $0.5349 per share.

 

Series A Preferred Stock (“Series A”)

 

Throughout 2012 and 2013, the Company entered into a Series A Preferred Stock purchase agreement for the sale of Series A Preferred Stock of the Company. The Company authorized the issuance and sales of 4,986,736 shares of Series Seed Preferred Stock, par value $0.0001 per share, at $0.756 per share, which are convertible into 4,986,736 shares of common stock. The Series A is entitled to receive dividends at $0.06048 per share and its liquidation preference is $0.756 per share.

 

Series A-1 Preferred Stock (“Series A-1”)

 

Throughout 2014, the Company entered into a Series A-1 Preferred Stock purchase agreement for the sale of Series A-1 Preferred Stock of the Company. The Company authorized the issuance and sales of 11,489,356 shares of Series A-1 Preferred Stock, par value $0.0001 per share, at $0.235 per share, which are convertible into 11,489,356 shares of common stock. The Series A-1 is entitled to receive dividends at $0.01880 per share and its liquidation preference is $0.235 per share

 

The following describes certain information with respect to all series of preferred stock:

 

Dividends  – Holders of all preferred stock classes shall, in any calendar year, be entitled to receive dividends, when and if declared by the Board of Directors, out of any assets at the time legally available, at an annual rate as set forth above for each share class. These rights are not cumulative, and no right to dividends shall accrue which are not declared or paid. Payment of any dividends to the holders of preferred stock shall be on a pro rata, pari passu basis in proportion to the dividend rates for each series of preferred stock. There have been no preferred stock dividends declared to date.

 

Liquidation  – In the event of any liquidation, holders of all preferred stock classes are entitled to the liquidation preference per share as set forth above plus any dividends declared but unpaid thereon. If upon the liquidation, dissolution or winding up of the Company, the assets of the Company legally available for distribution to the holders of the preferred stock are insufficient to permit the payment to such holders of the full amount of their liquidation preference, then the entire assets of the Company legally available for distribution will be distributed with equal priority and pro rata among the holders of the preferred stock in proportion to the full amounts they would otherwise be entitled to receive.

 

  12  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Conversion Rate – Each share of each class of preferred stock is convertible at the option of the holder, into a number of common stock as determined by dividing the respective preferred stock issue price by the conversion price in effect at the time. The initial conversion price of the Series Seed is $0.32478, Series Seed-1 is $0.5349, Series A is $0.756 and Series A-1 is $0.235 and are subject to adjustment in accordance with antidilution provisions. Antidilution provisions kick in when securities are sold at a per-share price below the conversion price that a preferred stockholder paid for their shares (other than securities explicitly excluded from antidilution provisions in the Company’s Articles of Incorporation). The adoption of ASU 2017-11, did not require the Company to account for the down round feature as a derivative liability at fair value. As of December 31, 2016, there have been no sales of securities that would have trigger antidilution.

 

Right of Conversion  –

 

Optional conversion: Each share of preferred stock shall be convertible, at the option of the holder thereof, at any time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of common stock at the then applicable Conversion Rate, as set forth above.

 

Mandatory Conversion : Each share of preferred stock shall automatically be converted into fully-paid, non-assessable shares of common stock at the then effective Conversion Rate for such share (i) immediately prior to the closing of a firm commitment underwritten initial public offering “Securities Act”), covering the offer and sale of the Company’s common stock, provided that the aggregate gross proceeds to the Company are not less than $35,000,000, or (ii) upon the receipt by the Company of a written request for such conversion from the holders of a majority of the preferred stock then outstanding (voting as a single class and on an as-converted basis), or, if later, the effective date for conversion, or upon the occurrence of an event, in each case as specified in such requests, provided, however, the Series A-1 Preferred Stock shall not be converted pursuant to (ii) without the prior written consent of a majority of the Series A-1 Preferred Stock then outstanding (each of the events referred to in (i) and (ii) are referred to herein as an “Automatic Conversion Event”).

 

Voting  – On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of preferred stock shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of preferred stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Certificate of Incorporation, holders of preferred stock shall vote together with the holders of common stock as a single class. Further, so long as at least 4,686,006 shares (as adjusted for Recapitalizations) of preferred stock remain outstanding, the holders of preferred stock, voting as a separate class, shall be entitled to elect two members of the Company’s Board of Directors.

 

Common Stock

 

As of December 31, 2016 and 2015, the Company has authorized 103,000,000 and 60,000,000 common shares of $0.0001 par value, respectively. Holders of common stock are entitled to one vote for each share held. The Company issued 20,000 and 15,833 common shares in relation to stock option exercises, at $0.048 per share, during the years ended December 31, 2016 and 2015, respectively.

 

Note 8 – Warrants

 

The Company issued warrants to purchase 2,645,502 shares of common stock that were issued in connection with a loan agreement in April 2014, which was repaid prior to December 31, 2014. The warrants have an exercise price of $0.001 and expire in October 2018. These warrants were exercised during August 2017.

 

During May 2016, the Company issued warrants to purchase shares of the Company’s common stock in connection with a secured convertible promissory note issued to an existing lender who is also a director.  The number of warrants to be issued, with an exercise price of $.01, is equal to (a) 100% of the original principal amount of the secured promissory note ($250,000) divided by (b) the purchase price per share paid by other investors with respect to a majority of the Next Equity Securities (as defined) issued in the Next Equity Financing.  As a result of the warrants not containing an explicit share limit, the warrants were classified as a derivative liability.  The warrant was initially valued at $244,873 based upon the intrinsic value of the warrant multiplied by the probability of a future capital raise using a Monte Carlo simulation valuation methodology. As the total fair value of the financial liabilities that were measured (the secured convertible note, the contingent redemption provision and the warrant issued to this lender/director) was in excess of the net proceeds received, the Company recorded a loss of $244,873 at the origination of this transaction which has been included in general and administrative expenses for the year ended December 31, 2016 in the accompanying statement of operations.

 

  13  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

The following assumptions were used to determine the fair value of the warrants for the year ended December 31, 2016: stock price: $0.25, expected term: 9.41 years, dividend yield: 0%, discount rate: 2.41%, volatility: 40.7%.

 

At December 31, 2016, the fair value of the warrant was $246,697. For the year ended December 31, 2016, the Company recognized a loss on the change in the fair value of the warrant of $1,824.

 

Note 9 – Options

 

Stock Option Plans

 

The Company’s Board of Directors approved the Company’s 2011 Equity Incentive Plan (the “2011 Plan”) during 2011. The Plan provides for the grant of up to 1,100,000 shares of common stock for issuance as non-statutory or incentive stock options, stock appreciation rights, restricted stock, restricted stock units to the Company’s employees, Officers, Directors or consultants. The Company’s Board of Directors administers the 2011 Plan, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each option. Stock options granted pursuant to the terms of the 2011 Plan generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant. The term of the options granted under the 2011 Plan cannot be greater than 10 years. Options vest at varying rates generally over three to five years along with performance based options.

 

In September 2016, the Board of Directors approved the increase in the number of shares issuable pursuant to the 2011 Plan to 46,200,097.

 

The following table reflects options activity:

 

          Weighted Average        
    Options for
Common Shares
    Exercise Price     Remaining Contractual Term     Aggregate
Intrinsic Value
 
Outstanding and exercisable as of January 1, 2015     1,415,594     $ 0.11       7.87     $ -  
Granted     -                          
Exercised     (15,833 )     0.05                  
Forfeited, expired     (4,167 )     0.05                
Outstanding as of December 31, 2015     1,395,594       0.10       6.75           -  
Granted     16,747,643       0.04                  
Exercised     (20,000 )     0.05                  
Forfeited, expired     (480,261 )     0.10                  
Outstanding as of December 31, 2016     17,642,976       0.04       9.60     -  

 

The Company recognized compensation expense of $136,250 and $35,511 related to stock options for the years ended December 31, 2016 and 2015, respectively. These amounts are included in general and administrative expenses in the statement of operations.

 

The fair value of options granted during the years ended December 31, 2016 and 2015 was approximately $212,961 and $0, respectively. As of December 31, 2016, there is approximately $142,597 of total unrecognized compensation expense related to unvested stock-based compensation arrangements granted, which cost is expected to be recognized over a weighted average period of 3.5 years. As of December 31, 2016, there were options to purchase 30,331,138 shares of common stock available for grant under the plan.

 

The following assumptions were used to determine the fair value of the options for the year ended December 31, 2016: stock price: $.24 - $.04, expected term: 3.22 - 5.5 years, dividend yield: 0%, discount rate: 1.34% - 2.02%, volatility: 47.64% - 52.56%.

 

  14  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

The following table summarizes additional information regarding outstanding and exercisable options under the stock option plans at December 31, 2016:

 

      Vested Options outstanding     All Options Outstanding  
Ex ercise     Number of     Weighted Average     Aggregate     Number of     Weighted Average     Aggregate  
Price     Options     Remaining Term     Intrinsic Value     Options     Remaining Term     Intrinsic Value  
                                                     
$ 0.040       4,604,974       9.81     $      -       16,747,643       9.81     $          -  
$ 0.048       350,198       5.32     $ -       643,515       5.41     $ -  
$ 0.240       241,818       6.44     $ -       251,818       6.44   $ -  
  Total       5,196,990                       17,642,976                  

 

Note 10 – Income Taxes

 

Reconciliations between the effective tax rate on income before income taxes and the federal statutory rate for the years ended December 31, 2016 and 2015 are presented below:

 

    2016     2015  
    Amount     % of Pre-tax     Amount     % of Pre-tax  
Tax at federal statutory rate   $ (1,671,564 )     34.00 %   $ (1,453,089 )     34.00 %
State taxes, net     (223,863 )     4.55 %     (169,099 )     3.96 %
Permanent items     63,164       -1.28 %     (6,915 )     0.16 %
Deferred true-up     24,036       -0.49 %     3,102       -0.07 %
Change in valuation allowance     1,808,228       -36.78 %     1,749,227       -40.86 %
R&D credit     (1 )     0.00 %     (123,226 )     2.81 %
Total provision/(benefit)   $ -       0.00 %   $ -     0.00 %

   

The deferred income tax assets consist of the following as of December 31, 2016 and 2015:

 

    2016     2015  
Deferred Tax Assets:            
Accrued expenses   $ 680,250     $ 477,127  
Stock compensation     42,505       21,400  
Net operating loss carryforwards (federal and state)     6,505,015       4,921,003  
Tax credits     120,125       120,124  
      7,347,895       5,539,654  
Deferred Tax Liabiltiies:                
Fixed assets     (13 )        
                 
Net Deferred Tax Asset     7,347,882       5,539,654  
                 
Valuation allowance     (7,347,882 )     (5,539,654 )
                 
Total Net Deferred Tax Asset   $ -     $ -  

 

The Company has provided for a full valuation allowance and no deferred tax assets and related tax benefit have been recognized in the accompanying financial statements as the realization of sufficient future taxable income during the expiration period of the net operating loss carryforward is uncertain.

 

As of December 31, 2016, the Company had approximately $16.1 million in federal and $14.2 million in state net operating loss carryovers. These carryforwards begin to expire in 2031.

 

  15  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Note 11 – Commitments and Contingencies

 

Office Lease Agreements

 

On August 1, 2014 the Company signed a lease for office space in New York, New York. The lease amount is partially based on the number of employees allowed access to the leased space. The lease does not have an expiration date but is subject to annual increases. The current monthly rental fee is approximately $5,900.

 

Legal Proceedings

 

In the ordinary course of business, the Company from time to time is involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the Company’s financial condition and/or results of operations. However, in the opinion of management, other than as set forth herein, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

Note 12 – Subsequent Events

 

The Company has evaluated subsequent events through November 29, 2017, the date that these financial statements were available to be issued.

 

(1) On August 15, 2017, the Company entered into a Securities Purchase Agreement with Helios and Matheson Analytics Inc. (“Helios”) which was subsequently amended on October 6, 2017 (as amended, the “Purchase Agreement”).  All of the transactions contemplated by the Purchase Agreement and the agreements and instruments called for thereunder are referred to as the “Transactions.”

 

Pursuant to the Purchase Agreement,  Helios agreed to purchase shares of the Company’s common stock amounting to 51.71% of the outstanding shares of the Company’s common stock on a post-transaction basis, for an aggregate purchase price of $28,500,000, payable in a combination of cash and Helios common stock over a period of time as follows:

 

I. In August 2017, the Company received $5,000,000 in cash in exchange for a portion of a subordinated convertible promissory note in the aggregate principal amount of $11,500,000 (the “Amended and Restated Note”) delivered by the Company to Helios;

 

II. In October 2017, the Company received $6,500,000 in cash in exchange for a the remainder of the $11,500,000 Amended and Restated Note delivered by the Company to Helios with such Amended and Restated Note; and

 

III. In October 2017 and in connection with the issuance of the Amended and Restated Note, the Company and Helios entered into an investment option agreement (the “Option Agreement”) pursuant to which Helios was granted an option for additional shares of up to 8.7% of Company common stock in an amount up to $20 million based on a pre-money valuation of the Company of $210,000,000 (the “Option”). In November 2017, Helios exercised a portion of this option (in the amount of $750,000) and pursuant to its terms, the Company issued Helios a subordinated convertible promissory note (the “Option Note”), in substantially the same form as the Amended and Restated Note, in the principal amount of $750,000.

 

At the closing of the Transaction, which will be completed at some point in the future upon the achievement of certain events including approval of the Transaction by Helios shareholders (the “Closing”), the following will occur:

 

IV. The $11,500,000 Amended and Restated Note issued by the Company to Helios as described in I and II above will be deemed canceled;

 

  16  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

V. A promissory note in the principal amount of $5,000,000 will be delivered by Helios to the Company which is due and payable as described below (the “Helios Note”);

 

VI. 4,000,000 shares of Helios common stock (666,667 shares of which are subject to forfeiture as described below) will be issued to by Helios to the Company based on an agreed upon value of $3.00 per share (the “Helios Shares”);

 

VII. The Company will issue to Helios shares of its common stock amounting to 51.71% of the outstanding shares of the Company’s common stock on a post-transaction basis for an aggregate purchase price of $28,500,000 payable to the Company from Helios as described in IV, V and VI above; and

 

VIII. The Company will issue the amount of shares of its common stock to Helios underlying the Option Note, and upon such issuance the Option Note will be deemed satisfied in full

 

Pursuant to the Purchase Agreement, from the Closing until the 12-month anniversary of the Closing, Helios will have full anti-dilution protection with respect to its ownership interest in the Company under which Helios will maintain its fully diluted percentage ownership of the Company regardless of any new issuances of securities by the Company (including Company common stock or securities convertible into or exercisable for shares of Company common stock) during such 12-month period.

 

A description of the consideration received and to be received by the Company as a result of Transactions is set forth below. 

 

Amended and Restated Note

 

The Amended and Restated Note was issued to Helios by the Company on October 6, 2017 upon execution of the amendment to the Purchase Agreement. The Amended and Restated Note amends and restates the subordinated convertible promissory note issued to Helios by the Company on August 18, 2017 (the “Original Note”) in the principal amount of $5,000,000 in connection with Helios and reflects (i) Helios advancing $5,000,000 to the Company that would have otherwise been due within 90 days following the Closing and (ii) Helios making an additional investment of $1,500,000 to purchase additional shares of Company common stock amounting to 0.71% of the outstanding shares of common stock of the Company effective as of the Closing (the “Additional Investment”), such Additional Investment being based upon a pre-money Company valuation of $210,000,000.

 

The cumulative indebtedness memorialized by the Amended and Restated Note bears interest at 5% per annum and outstanding amounts are due and payable upon demand of the holder at any time after the two-year anniversary of the original issue date (i.e, August 18, 2019), provided however that the Amended and Restated Note will be canceled and the Company will have no obligation to repay the Amended and Restated Note upon Closing.  If, and only if, the Purchase Agreement is terminated, amounts outstanding under the Amended and Restated Note (including accrued interest, the “Conversion Amount”) are convertible into shares of Company common stock upon the closing of the Company’s “Next Equity Financing” (as defined in the Amended and Restated Note) following such termination. The number of shares of to be issued upon such conversion will be equal to the quotient obtained by dividing (i) the Conversion Amount by (ii) 80.00% of the cash price per share of the Next Equity Securities (as defined in the Amended and Restated Note) sold in the Next Equity Financing (subject to certain exclusions) (the “Note Conversion Price”). The Note Conversion Price, however, will not be greater than: (1) for $10,000,000 of the principal amount of the Amended and Restated Note, including accrued interest thereon, the quotient obtained by dividing (x) $25,000,000 by (y) the total number of shares of Company common stock outstanding (assuming full conversion and exercise of all convertible or exercisable securities other than (i) the Notes (as defined in that certain Note Purchase Agreement, as amended), (ii) other outstanding convertible notes and (iii) outstanding convertible equity securities); and (2) for the remaining $1,500,000 of the principal amount of the Amended and Restated Note, including accrued interest thereon, the quotient obtained by dividing (x) $210,000,000 by (y) the total number of shares of Company common stock outstanding (assuming full conversion and exercise of all convertible or exercisable securities other than (i) the Notes (as defined in that certain Note Purchase Agreement, as amended), (ii) other outstanding convertible notes and (iii) outstanding convertible equity securities).

 

  17  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Helios Note

 

At Closing, Helios will issue to the Company the Helios Note in the principal amount of $5,000,000. The Helios Note will be due and payable on the later of (i) the 180th calendar day following Closing and (ii) such date on which the Company’s common stock is listed on any of the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange (each, an “Exchange”). The Helios Note will bear interest at an annual rate of 5%.  If the Company has not listed on an Exchange on or before June 1, 2018, then Helios is obligated to redeem the outstanding principal amount and accrued but unpaid interest on the Helios Note (the “Redemption Amount”) within 10 business days (subject to extension between the parties) and Helios will be required to tender for immediate cancellation a number of shares of Company common stock equal to the Redemption Amount divided by the Closing Share Price (as defined in the Helios Note).  In connection with the Helios Note, Helios pledged to the Company 44% of the shares of Company common stock that Helios will receive pursuant to the Purchase Agreement as collateral against payment of the Helios Note.

 

Helios Shares

 

At Closing, Helios will issue the Company 4,000,000 shares of Helios common stock. Such Helios Shares include 666,667 shares of Helios common stock that are due to the Company as a result of the Company’s subscription service exceeding 150,000 subscribers on at least one (1) day within 15 months after the Closing, such milestone already having been accomplished. Of the Helios Shares, 666,667 shares are subject to forfeiture if the Company fails to achieve either of the following two milestones within their specified time frames: (A) within one year after the Closing, subscribers have exceeded on at least one (1) day 100,000 subscribers (such number of subscribers to be determined based upon the number of registered accounts, and (B) the Company’s common stock will have been listed on an Exchange by January 31, 2018 (unless such failure to be listed is remedied within 60 calendar days thereafter).

 

Helios Option

 

On October 11, 2017, the Company and Helios entered into an Option Agreement pursuant to which Helios was granted an option to purchase additional shares of Company common stock in an amount up to $20 million based on a pre-money valuation of the Company of $210,000,000. If the Option is exercised in full by Helios, Helios will acquire an additional 8.7% of the Currently Outstanding Shares of Common Stock (as defined in the Option Agreement) of the Company, giving effect to the Closing. The Option may be exercised by Helios at any time until the thirtieth day after Helios receives the Company’s most recent audited and interim period financial statements. In the event Helios exercises the Option in whole or in part prior to the Closing, then the Company will issue Helios an (the “Option Note” ), in substantially the same form as the Amended and Restated Note, in the principal amount equal to the amount of the Option that Helios exercised and, immediately upon the Closing, the Company will issue the amount of shares of its common stock to Helios underlying the Option Note, and upon such issuance the Option Note will be deemed satisfied in full.

 

Chris Kelly Note

 

In addition to the foregoing and pursuant to the Purchase Agreement, Helios is required to purchase from one of the Company’s directors, Chris Kelly, one or more convertible promissory notes in the aggregate principal amount of $1,000,000 which Helios will promptly convert into shares of Company common stock amounting to a minimum of 2% of the outstanding shares of the Company’s common stock on a post-transaction basis,.

 

Company Guaranty of Helios Notes

 

On November 6, 2017, pursuant to a securities purchase agreement entered into by Helios and certain institutional investors, Helios agreed to sell and issue senior convertible notes in the aggregate principal amount of $100,000,000, consisting of (i) Series A Senior Bridge Convertible Notes in the aggregate principal amount of $5,000,000 and (ii) Series B Senior Secured Bridge Convertible Notes in the aggregate principal amount of $95,000,000 (collectively, the “Notes”) for consideration consisting of (i) cash payments in the aggregate amount of $5,000,000, and (ii) secured promissory notes payable by the buyers to Helios in the aggregate principal amount of $95,000,000 with an aggregate mandatory prepayment obligation in the amount of $2,235,714.29 to be made by the buyers every week beginning November 13, 2017 and every Monday thereafter including December 26, 2017 for an aggregate amount of approximately $20,650,000, including the amounts funded in connection with the Series A Notes.

 

  18  

 

 

MoviePass Inc.

Notes to Financial Statements

December 31, 2016 and 2015

 

Unless earlier converted or redeemed, the Notes will mature on the second anniversary of the closing date. Helios is required to redeem the Notes (i) at the option of the investor upon seven months following the closing date; (ii) if the Company completes a subsequent public or private offering of debt or equity securities, including equity-linked securities; (iii) upon the occurrence of an Event of Default, including a Bankruptcy Event of Default (each, as defined in the Notes); or (iv) in the event of a Change of Control (as defined in the Notes). With the exception of a redemption required by an Event of Default, which may be paid with cash or shares of Helios common stock at the election of the Buyer, the Helios will be required to redeem the Notes with cash. All amounts outstanding under the Notes will be secured by the Investor Note and all proceeds therefrom.

 

The Company will provide a Guaranty to each of the Buyers pursuant to which it will (i) guarantee the punctual payment of all obligations under the Notes, including all interest, make-whole and other amounts that accrue after the commencement of any insolvency proceeding of the Company, whether or not the payment of such obligations are enforceable or allowable in the insolvency proceeding, and all fees, interest, premiums, penalties, causes of actions, costs, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Financing documents, and (ii) agree to pay any and all costs and expenses (including counsel fees and expenses) incurred by the Buyer in enforcing any rights under the Guaranty or any other Financing document.

 

(2) During 2017, the Company granted options to purchase 5,870,477 shares of common stock with an exercise price of $0.08 per share.

 

 

19

 

 

 

 

Exhibit 99.2

 

MoviePass, Inc.

 

INDEX TO THE UNAUDITED FINANCIAL STATEMENTS

 

Balance Sheet as of September 30, 2017 (unaudited) 2
Statements of Operations for the nine months ended September 30, 2017 and 2016 (unaudited) 3
Statements of Stockholders’ Equity (Deficit) for the nine months ended September 30, 2017 (unaudited) 4
Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (unaudited) 5
Notes to Financial Statements (unaudited) 6

 

  1  

 

 

MoviePass Inc.

Balance Sheet

(unaudited)

 

    September 30,  
    2017  
Assets      
Current Assets:      
Cash   $ 3,341,247  
Accounts receivable, net     273,315  
Prepaid expenses     71,148  
Total Current Assets     3,685,710  
Property and equipment, net     40,251  
Other assets     8,000  
Domain names     25,965  
Total Assets   $ 3,759,926  
Liabilities and Stockholders’ Equity (Deficit)        
Current Liabilities:        
Accounts payable   $ 1,504,384  
Accrued expenses     755,069  
Accrued interest     842,696  
Gift card liabilities     21,784  
Deferred revenue     4,257,858  
Warrant liability     244,748  
Convertible notes payable-current portion     9,477,188  
Total Current Liabilities     17,103,727  
Convertible notes payable     8,156,970  
Total Liabilities     25,260,697  
         
Stockholders’ Equity (Deficit):        
Preferred stock series seed, par value $0.0001, 4,510,741 shares authorized, 4,510,741 shares issued and outstanding at September 30, 2017     451  
Preferred stock series seed-1, par value $0.0001, 486,666 shares authorized, 486,666 shares issued and outstanding at September 30, 2017     49  
Preferred stock series A, par value $0.0001, 7,632,239 shares authorized, 4,986,736 shares issued and outstanding  at September 30, 2017     499  
Preferred stock series A-1, par value $0.0001, 29,123,721 shares authorized, 11,489,356 shares issued and outstanding at September 30, 2017     1,149  
Common stock, par value $0.0001, 103,000,000 shares authorized, 12,964,652 shares issued and outstanding at September 30, 2017     1,296  
Additional paid-in capital     9,128,137  
Accumulated deficit     (30,632,352 )
Total Stockholders’ Equity (Deficit)     (21,500,771 )
Total Liabilities and Stockholders’ Equity   $ 3,759,926  

 

The accompanying notes are an integral part of these financial statements.

 

  2  

 

 

MoviePass Inc.

Statements of Operations

(unaudited)

 

    Nine Months Ended
September 30,
 
    2017     2016  
             
Subscription revenues   $ 4,967,689     $ 6,798,401  
Other revenues     660       20,012  
Total revenues     4,968,349       6,818,413  
                 
Subscription cost of revenues     9,592,336       8,004,268  
Other cost of revenues     20,527       760  
Total cost of revenues     9,612,863       8,005,028  
Gross loss     (4,644,514 )     (1,186,615 )
Operating expenses:                
Payroll     962,976       871,552  
Professional fees     1,704,086       358,481  
General and administrative expenses     2,222,136       1,305,083  
Sales and marketing     319,417       175,448  
Depreciation and amortization     86,658       78,912  
    Total operating expenses     5,295,273       2,789,476  
                 
Loss from operations     (9,939,787 )     (3,976,091 )
                 
Other income (expense):                
Interest expense     (400,046 )     (222,470 )
Change in fair value of convertible notes     (1,358,977 )     179,552  
Change in fair value of warrant liability     1,949       (971 )
Total other expense, net     (1,757,074 )     (43,889 )
                 
Net loss   $ (11,696,861 )   $ (4,019,980 )

 

The accompanying notes are an integral part of these financial statements.

 

  3  

 

 

MoviePass Inc.

Statement of Stockholders’ Equity (Deficit)

(unaudited)

 

    Preferred Stock - Series Seed     Preferred Stock - Series Seed-1     Preferred Stock - Series A     Preferred Stock - Series A-1     Common Stock    

Additional
Paid-In

    Accumulated    

Total Stockholders’

Equity
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     (Deficit)  
Balance at December 31, 2016     4,510,741     $ 451       486,666     $ 49       4,986,736     $ 499       11,489,356     $ 1,149       10,125,567     $ 1,013     $ 9,029,996     $ (18,935,491 )   $ (9,902,334 )
Shares issued for excercises of options     -       -       -       -       -       -       -       -       193,583       19       11,193       -       11,212  
Shares issued for excercises of warrants     -       -       -       -       -       -       -       -       2,645,502       264       2,380       -       2,644  
Stock option expense     -       -       -       -       -       -       -       -       -       -       84,568       -       84,568  
Net loss     -       -       -       -       -       -       -       -       -       -       -       (11,696,861 )     (11,696,861 )
Balance at September 30, 2017     4,510,741     $ 451       486,666     $ 49       4,986,736     $ 499       11,489,356     $ 1,149       12,964,652     $ 1,296     $ 9,128,137     $ (30,632,352 )   $ (21,500,771 )

 

The accompanying notes are an integral part of these financial statements.

 

  4  

 

 

MoviePass Inc.

Statements of Cash Flows

(unaudited)

 

    Nine Months Ended
September 30,
 
    2017     2016  
Cash flows from operating activities:            
Net loss   $ (11,696,861 )   $ (4,019,980 )
Adjustments to reconcile from net loss to net cash used in operating activities:                
Depreciation and amortization     86,658       78,912  
Stock options expense     84,568       52,038  
Loss on issuance of warrants     -       244,873  
Change in fair value of convertible notes     1,358,977       (179,552 )
Change in fair value of warrant liability     (1,949 )     971  
Changes in operating assets and liabilities                
Accounts receivable, net     (217,535 )     8,468  
Prepaid expenses     (63,980 )     26,615  
Accounts payable     983,133       124,725  
Accrued expenses     241,254       255,916  
Accrued interest     400,046       222,470  
Gift card liabilities     (57,274 )     (105,611 )
Deferred revenue     3,955,202       (85,189 )
Net cash used in operating activities     (4,927,761 )     (3,375,344 )
                 
Cash flows from investing activities:                
Purchases of property and equipment     (8,592 )     -  
Net cash used in investing activities     (8,592 )     -  
                 
Cash flows from financing activities:                
Proceeds from notes payable     8,105,000       -  
Proceeds from stock option excercises     11,212       -  
Proceeds from warrant excercises     2,644       3,375,960  
Net cash provided by financing activities     8,118,856       3,375,960  
                 
Net increase in cash     3,182,503       616  
Cash, beginning of period     158,744       82,234  
Cash, end of period   $ 3,341,247     $ 82,850  
                 
Supplemental disclosure of cash flow information:                
Cash paid during the period for:                
Interest   $ -     $ -  
Income taxes   $ -     $ -  

 

The accompanying notes are an integral part of these financial statements.

 

  5  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Note 1 - Organization and Nature of Business

 

MoviePass, Inc. (MoviePass” or the “Company”), is a Delaware corporation formed in 2011, is a theatrical movie subscription service which allows subscribers to attend a movie a day for a fixed monthly fee. The Company’s service is available in a majority of theaters throughout the United States.

 

Note 2 – Liquidity

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenue sufficient to cover its operating costs and allow it to continue as a going concern. The Company has a history of recurring losses from operations and use of cash in operating activities while in the process of developing its business. For the nine months ended September 30, 2017 and 2016, the Company’s loss from operations was $9,939,787 and $3,976,091 and cash used in operating activities was $4,927,761 and $3,375,344, respectively. Additionally, as of September 30, 2017, the Company had negative working capital of $13,418,017. 

 

Management believes that in order for the Company to meet its obligations arising from normal business operations through November 30, 2018 that the Company requires (i) additional capital either in the form of equity or debt and/or (ii) additional sales of its subscription services that will generate sufficient operating profit and cash flows to fund operations.  Without additional capital or additional sales of its services, the Company’s ability to continue to operate will be limited. If the Company is unable to obtain adequate capital, it could be forced to cease or reduce its operations. The Company is currently pursuing capital transactions in the form of debt and equity (see Note 7), however, management cannot provide any assurance that the Company will be successful in its plans. These financial statements do not include any adjustments to the recoverability and classification of recorded assets amounts and classification of liabilities that might be necessary should the Company not be able to continue as a going concern.

 

Note 3 – Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying financial statements have been prepared by the Company in accordance with generally accepted accounting principles in the United States of America. In the opinion of management, these interim financial statements reflect all adjustments consisting of normal recurring accruals, necessary for a fair statement of our financial position, results of operations and cash flows for such periods. The results of operations for any interim period are not necessarily indicative of the results for the full year.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

 

Revenue Recognition

 

Revenue is principally derived from subscription services. The Company recognizes revenue, net of sales discounts, when: (1) persuasive evidence of an arrangement exists with the customer reflecting the terms and conditions under which products or services will be provided; (2) delivery has occurred or services have been provided; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured. For all revenue transactions, the Company considers customer registration, payment, or third party acknowledgment to be persuasive evidence of an arrangement. Cost of revenue consists of the cost of the purchased goods related to the corresponding sales transaction. Subscription revenue is recognized ratably on a straight-line basis over the duration of the subscription period.

 

  6  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Deferred Revenue

 

Deferred revenue consists of prepaid but unrecognized subscription revenue received in advance of the completion of the delivery of services. The Company classifies deferred revenue as short-term when the subscription period is less than one year and as long-term when the subscription period is greater than one year.

 

Domain Names

 

Domain names are deemed to have an indefinite useful life based primarily on the Company’s plans for continued indefinite use, are not amortized, but are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test for indefinite-lived domain names consists of a comparison of their fair value with their carrying amount.

 

Software Development Costs

 

Property, plant and equipment mainly consists of costs incurred to develop software. Costs incurred in developing the software are charged to expense until technological feasibility has been established. Once technological feasibility is established, all software costs are capitalized and amortized on a straight-line basis over the software’s estimated useful life, which is generally three years. Maintenance and training costs are charged to expense as incurred.

 

Impairment of Long-Lived Assets

 

The Company assesses the recoverability of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. Management believes that there was no impairment of long-lived assets for the nine months ended September 30, 2017 and 2016. There can be no assurance, however, that market conditions or demand for the Company’s products or services will not change which could result in long-lived asset impairment charges in the future.

 

Gift Card liabilities

 

The Company sells gift cards on its website in customizable denominations. Once purchased, these gift cards can be freely transferred and remain a liability until the holder redeems the balance for monthly subscription fees by either creating a new account or using the balance to apply funds to an already existing account.

 

Derivative Financial Instruments

 

The Company accounts for warrants issued in conjunction with debt in accordance with the guidance contained in ASC Topic 815, Derivatives and Hedging. For warrant instruments that are not deemed to be indexed to the Company’s own stock, the Company classifies the warrant instrument as a liability at its fair value and adjusts the instrument to fair value at each reporting period. The liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statements of operations. The fair value of the Company’s warrant liability was based upon the intrinsic value of the warrant multiplied by the probability of a future capital raise using a Monte Carlo simulation valuation methodology.

 

  7  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Fair Value of Financial Instruments

 

The Company utilizes ASC 820-10, Fair Value Measurement and Disclosure , for valuing financial assets and liabilities measured on a recurring basis. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1. Observable inputs such as quoted prices in active markets;

 

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The table below describes the Company’s valuation of financial instruments using guidance from ASC 820-10:

 

    Fair Value Measurments Using:  
    Level 1     Level 2     Level 3  
As of September 30, 2017                  
Current liabilities:                  
Convertible notes   $          -     $           -     $ 9,477,188  
Warrant liability   $ -     $ -     $ 244,748  
Non-current liabilities:                        
Convertible notes   $ -     $ -     $ 8,156,970  

 

The Company has valued convertible notes and warrants as level 3 instruments. In addition to volatility, the risk-free rate, the time to maturity, and the discount rate, additional unobservable inputs include the timing of a financing round, which in all cases is assumed to be one year from the valuation date. The notes are valued using a combination of a Monte Carlo simulation and discounted cash flow analysis.  The beneficial conversion feature imbedded in the notes is valued within the Monte Carlo framework by simulating the stock price as of the estimated funding date, and then computing the expected payoff (in excess of the principal & accrued interest at time of conversion) upon conversion. The fair value of the Company’s warrants was based upon the intrinsic value of the warrant multiplied by the probability of a future capital raise using a Monte Carlo simulation valuation methodology

 

The following table reconciles the changes in the fair value of the convertible notes and the warrant liability categorized within Level 3 of the fair value hierarchy for the nine months ended September 30, 2017:

 

    Level 3 Instruments  
    Convertible Notes     Warrant Liability  
Balance at December 31, 2016   $ 8,170,181     $ 246,697  
Fair value of convertibles notes issued     8,105,000       -  
Change in fair value of convertible notes     1,358,977       -  
Change in fair value of warrant liability     -       (1,949 )
Balance at September 30, 2017   $ 17,634,158     $ 244,748  

 

Stock Based Compensation

 

Stock-based compensation represents the cost related to stock-based awards granted to employees and others. The Company measures stock-based compensation cost to employees at grant date, based on the estimated fair value of the award, and recognizes the cost as expense on a straight-line basis over the employee requisite service period. The Company estimates the fair value of stock options using the Black-Scholes valuation model. The Company elected to early adopt ASU No. 2016-09 Compensation — Stock Compensation to record forfeitures as they occur. Prior to the adoption of this guidance, the Company did not record forfeitures as they were immaterial.

 

For non-employee stock-based compensation, the Company applies FASB ASC Topic 505  Equity-Based Payments to Non-Employees , which requires stock-based compensation related to non-employees to be accounted for based on the fair value of the related stock or options or the fair value of the services on the grant date, whichever is more readily determinable in accordance with FASB ASC Topic 718.

 

  8  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Concentrations

 

The Company obtains tickets from multiple theater chains and is actively engaging more in new markets. However, for the nine months ended September 30, 2017 and 2016, one ticket supplier made up 93% and 97% of all cost of ticket sales. The loss of this ticket supplier would have a material impact on the Company’s revenues

 

Income Taxes

 

The Company accounts for its income taxes in accordance with Income Taxes Topic of the FASB ASC 740, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. A valuation allowance against deferred income tax asset will be recorded if, based on the weight of available evidence, it is more likely than not that some or all of the deferred income tax assets will not be realized. As of September 30, 2017 and December 31, 2016, all of the Company’s net deferred income tax assets were subject to a full valuation allowance.

 

The Company recognizes the impact of an uncertain income tax position in the financial statements if it believes that the position is more likely than not to be sustained by the relevant taxing authority. As of September 30, 2017 and December 31, 2016, the Company had no uncertain income tax positions.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases , which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 for public companies and December 15, 2019 for private companies with early adoption permitted. Under ASU 2016-02, lessees will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease measured on a discounted basis, and a right to-use asset, which is an asset that represents the lessee’s right to use or control the use of a specified asset for the lease term. The Company is currently evaluating the effect that the new guidance will have on its financial statements and related disclosures.

 

In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most recent current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also specifies the accounting for certain incremental costs of obtaining a contract and costs to fulfill a contract with a customer. Entities have the option of applying either a full retrospective approach to all periods presented or a modified approach that reflects differences prior to the date of adoption as an adjustment to equity. In April 2015, the FASB deferred the effective date of this guidance until January 1, 2019 for private companies and January 1, 2018 for public companies and the Company is currently assessing the impact of this guidance on its financial statements.

 

  9  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Note 3 – Other Assets

 

Other Assets consists of a deposit for leased building space. See Note 12 for more information.

 

Note 4 – Property and Equipment

 

Property and equipment is comprised of the following:

 

    September 30, 2017  
Computers   $ 10,686  
Developed software     1,096,992  
Total assets     1,107,678  
Less: accumulated depreciation     (1,067,427 )
Property and Equipment, net   $ 40,251  

 

Depreciation and amortization expense for the nine months ended September 30, 2017 and 2016 was $86,658 and $78,912, respectively.

 

Note 5 – Accrued Expenses

 

Accrued expenses consist of the following:

 

    September 30, 2017  
Accrued cost of tickets   $ 580,738  
Payroll liabilities     16,042  
Other accrued expenses     158,289  
Total   $ 755,069  

 

Note 6 – Convertible Notes Payable

 

Convertible notes payable consists of the following:

 

    September 30, 2017  
    Fair
Value
    Principal Balance     Accrued Interest  
2014 Convertible promissory notes   $ 904,286     $ 744,975     $ 105,587  
2015 Convertible promissory notes     5,383,652       5,151,480       512,697  
Secured convertible promissory note     311,600       250,000       16,849  
Subordinated convertible notes     11,034,620       10,330,000       207,563  
Total     17,634,158       16,476,455       842,696  
Less: current portion     9,477,188       8,855,000       842,696  
Long-term portion   $ 8,156,970     $ 7,621,455     $ -  

 

2014 Convertible Notes

 

In November and December 2014, the Company issued convertible notes with an aggregate principal value of $744,975. These notes accrue 5% interest and have maturity dates between November and December 2017. The notes are convertible into shares of common stock upon a preferred stock equity raise of greater than $1,000,000 at a price per share equal to that raise, or upon election of the majority of holders based on outstanding value upon a preferred stock equity raise of less than $1,000,000 at the same price per share. Further, the notes may be convertible upon election of the majority of holders based on outstanding value upon a qualified change of control or upon or after the maturity date at an Adjusted Conversion Price equal to $14,000,000 divided by the number of fully diluted common shares.

 

  10  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

2015 Convertible Notes

 

From January 2015 to June 2016, the Company issued convertible notes with an aggregate principal value of $5,151,480. These notes accrue 5% interest and have maturity dates between January 2018 and June 2018. The notes are convertible into shares of common stock upon a preferred stock equity raise of greater than $1,000,000 at a price per share equal to that raise, or upon election of the majority of holders based on outstanding value upon a preferred stock equity raise of less than $1,000,000 at the same price per share. Further, the notes are convertible upon election of the majority of holders based on outstanding value upon a qualified change of control or upon or after the maturity date at an Adjusted Conversion Price equal to $25,000,000 divided by the number of fully diluted common shares.

 

Secured Promissory Convertible Note

 

In May 2016, the Company issued a secured convertible note to an existing lender who is also a director, with a principal value of $250,000 and contingently issuable warrants to purchase the Company’s common stock (see Note 8). This note accrues 5% interest and has maturity date in May 2018. The note is convertible, at the election of the holder, into shares of common stock upon a preferred stock equity raise of greater than $1,000,000 at the lesser of 80% of the price per share of such raise, or an Adjusted Conversion Price equal to $25,000,000 divided by the number of fully diluted common shares.

 

Subordinated Convertible Notes

 

During 2016, the Company issued subordinated convertible notes with an aggregate principal value of $2,225,000. These notes accrue 5% interest and have maturity dates between June 2018 and June 2019. The notes are convertible, at the election of the majority of the holders, based on outstanding value, into shares of common stock upon a preferred stock equity raise of greater than $1,000,000 at the lesser of 80% of the price per share of such raise, or an Adjusted Conversion Price equal to $25,000,000 divided by the number of fully diluted common shares. During 2017, the Company issued additional subordinated convertible notes with an aggregate principal value of $3,105,000.

 

Fair Value Option

 

As optional contingent redemption provisions within all of the convertible notes and the Helios Note (see Note 7) require bifurcation, the Company has elected to recognize and measure all of the convertible notes at fair value, with changes in fair value recognized in earnings, pursuant to the fair value option in ASC 825. For the nine months ended September 30, 2017 and 2016, the Company recognized a (loss)gain on the change in the fair value of the convertible notes of ($1,358,977) and $179,552, respectively.

 

Note 7 – Helios Securities Purchase Agreement

 

On August 15, 2017, the Company entered into a Securities Purchase Agreement with Helios and Matheson Analytics Inc. (“Helios”) which was subsequently amended on October 6, 2017 (as amended, the “Purchase Agreement”).  All of the transactions contemplated by the Purchase Agreement and the agreements and instruments called for thereunder are referred to as the “Transactions.”

 

  11  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Pursuant to the Purchase Agreement, Helios agreed to purchase shares of the Company’s common stock amounting to 51.71% of the outstanding shares of the Company’s common stock on a post-transaction basis, for an aggregate purchase price of $28,500,000, payable in a combination of cash and Helios common stock over a period of time as follows:

 

I.   In August 2017, the Company received $5,000,000 in cash in exchange for a portion of a subordinated convertible promissory note (included in secured convertible notes at September 30, 2017) in the aggregate principal amount of $11,500,000 (the “Amended and Restated Note”) delivered by the Company to Helios;

 

II.   In October 2017, the Company received $6,500,000 in cash in exchange for a the remainder of the $11,500,000 Amended and Restated Note delivered by the Company to Helios with such Amended and Restated Note; and

 

III.   In October 2017 and in connection with the issuance of the Amended and Restated Note, the Company and Helios entered into an investment option agreement (the “Option Agreement”) pursuant to which Helios was granted an option for additional shares of up to 8.7% of Company common stock in an amount up to $20 million based on a pre-money valuation of the Company of $210,000,000 (the “Option”). In November 2017, Helios exercised a portion of this option (in the amount of $750,000) and pursuant to its terms, the Company issued Helios a subordinated convertible promissory note (the “Option Note”), in substantially the same form as the Amended and Restated Note, in the principal amount of $750,000.

 

At the closing of the Transaction, which will be completed at some point in the future upon the achievement of certain events including approval of the Transaction by Helios shareholders (the “Closing”), the following will occur:

 

IV.   The $11,500,000 Amended and Restated Note issued by the Company to Helios as described in I and II above will be deemed canceled;

 

V.   A promissory note in the principal amount of $5,000,000 will be delivered by Helios to the Company which is due and payable as described below (the “Helios Note”);

 

VI.   4,000,000 shares of Helios common stock (666,667 shares of which are subject to forfeiture as described below) will be issued to by Helios to the Company based on an agreed upon value of $3.00 per share (the “Helios Shares”);

 

VII.   The Company will issue to Helios shares of its common stock amounting to 51.71% of the outstanding shares of the Company’s common stock on a post-transaction basis for an aggregate purchase price of $28,500,000 payable to the Company from Helios as described in IV, V and VI above; and

 

VIII.   The Company will issue the amount of shares of its common stock to Helios underlying the Option Note, and upon such issuance the Option Note will be deemed satisfied in full

 

Pursuant to the Purchase Agreement, from the Closing until the 12-month anniversary of the Closing, Helios will have full anti-dilution protection with respect to its ownership interest in the Company under which Helios will maintain its fully diluted percentage ownership of the Company regardless of any new issuances of securities by the Company (including Company common stock or securities convertible into or exercisable for shares of Company common stock) during such 12-month period.

 

A description of the consideration received and to be received by the Company as a result of Transactions is set forth below. 

 

Amended and Restated Note

 

The Amended and Restated Note was issued to Helios by the Company on October 6, 2017 upon execution of the amendment to the Purchase Agreement. The Amended and Restated Note amends and restates the subordinated convertible promissory note issued to Helios by the Company on August 18, 2017 (the “Original Note”) in the principal amount of $5,000,000 in connection with Helios and reflects (i) Helios advancing $5,000,000 to the Company that would have otherwise been due within 90 days following the Closing and (ii) Helios making an additional investment of $1,500,000 to purchase additional shares of Company common stock amounting to 0.71% of the outstanding shares of common stock of the Company effective as of the Closing (the “Additional Investment”), such Additional Investment being based upon a pre-money Company valuation of $210,000,000.

 

  12  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

The cumulative indebtedness memorialized by the Amended and Restated Note bears interest at 5% per annum and outstanding amounts are due and payable upon demand of the holder at any time after the two-year anniversary of the original issue date (i.e, August 18, 2019), provided however that the Amended and Restated Note will be canceled and the Company will have no obligation to repay the Amended and Restated Note upon Closing.  If, and only if, the Purchase Agreement is terminated, amounts outstanding under the Amended and Restated Note (including accrued interest, the “Conversion Amount”) are convertible into shares of Company common stock upon the closing of the Company’s “Next Equity Financing” (as defined in the Amended and Restated Note) following such termination. The number of shares of to be issued upon such conversion will be equal to the quotient obtained by dividing (i) the Conversion Amount by (ii) 80.00% of the cash price per share of the Next Equity Securities (as defined in the Amended and Restated Note) sold in the Next Equity Financing (subject to certain exclusions) (the “Note Conversion Price”). The Note Conversion Price, however, will not be greater than: (1) for $10,000,000 of the principal amount of the Amended and Restated Note, including accrued interest thereon, the quotient obtained by dividing (x) $25,000,000 by (y) the total number of shares of Company common stock outstanding (assuming full conversion and exercise of all convertible or exercisable securities other than (i) the Notes (as defined in that certain Note Purchase Agreement, as amended), (ii) other outstanding convertible notes and (iii) outstanding convertible equity securities); and (2) for the remaining $1,500,000 of the principal amount of the Amended and Restated Note, including accrued interest thereon, the quotient obtained by dividing (x) $210,000,000 by (y) the total number of shares of Company common stock outstanding (assuming full conversion and exercise of all convertible or exercisable securities other than (i) the Notes (as defined in that certain Note Purchase Agreement, as amended), (ii) other outstanding convertible notes and (iii) outstanding convertible equity securities).

 

Helios Note

 

At Closing, Helios will issue to the Company the Helios Note in the principal amount of $5,000,000. The Helios Note will be due and payable on the later of (i) the 180th calendar day following Closing and (ii) such date on which the Company’s common stock is listed on any of the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market or the New York Stock Exchange (each, an “Exchange”). The Helios Note will bear interest at an annual rate of 5%.  If the Company has not listed on an Exchange on or before June 1, 2018, then Helios is obligated to redeem the outstanding principal amount and accrued but unpaid interest on the Helios Note (the “Redemption Amount”) within 10 business days (subject to extension between the parties) and Helios will be required to tender for immediate cancellation a number of shares of Company common stock equal to the Redemption Amount divided by the Closing Share Price (as defined in the Helios Note).  In connection with the Helios Note, Helios pledged to the Company 44% of the shares of Company common stock that Helios will receive pursuant to the Purchase Agreement as collateral against payment of the Helios Note.

 

Helios Shares

 

At Closing, Helios will issue the Company 4,000,000 shares of Helios common stock. Such Helios Shares include 666,667 shares of Helios common stock that are due to the Company as a result of the Company’s subscription service exceeding 150,000 subscribers on at least one (1) day within 15 months after the Closing, such milestone already having been accomplished. Of the Helios Shares, 666,667 shares are subject to forfeiture if the Company fails to achieve either of the following two milestones within their specified time frames: (A) within one year after the Closing, subscribers have exceeded on at least one (1) day 100,000 subscribers (such number of subscribers to be determined based upon the number of registered accounts, and (B) the Company’s common stock will have been listed on an Exchange by January 31, 2018 (unless such failure to be listed is remedied within 60 calendar days thereafter).

 

Helios Option

 

On October 11, 2017, the Company and Helios entered into an Option Agreement pursuant to which Helios was granted an option to purchase additional shares of Company common stock in an amount up to $20 million based on a pre-money valuation of the Company of $210,000,000. If the Option is exercised in full by Helios, Helios will acquire an additional 8.7% of the Currently Outstanding Shares of Common Stock (as defined in the Option Agreement) of the Company, giving effect to the Closing. The Option may be exercised by Helios at any time until the thirtieth day after Helios receives the Company’s most recent audited and interim period financial statements. In the event Helios exercises the Option in whole or in part prior to the Closing, then the Company will issue Helios an (the “Option Note”), in substantially the same form as the Amended and Restated Note, in the principal amount equal to the amount of the Option that Helios exercised and, immediately upon the Closing, the Company will issue the amount of shares of its common stock to Helios underlying the Option Note, and upon such issuance the Option Note will be deemed satisfied in full.

 

  13  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Chris Kelly Note

 

In addition to the foregoing and pursuant to the Purchase Agreement, Helios is required to purchase from one of the Company’s directors, Chris Kelly, one or more convertible promissory notes in the aggregate principal amount of $1,000,000 which Helios will promptly convert into shares of Company common stock amounting to a minimum of 2% of the outstanding shares of the Company’s common stock on a post-transaction basis.

 

Company Guaranty of Helios Notes

 

On November 6, 2017, pursuant to a securities purchase agreement entered into by Helios and certain institutional investors, Helios agreed to sell and issue senior convertible notes in the aggregate principal amount of $100,000,000, consisting of (i) Series A Senior Bridge Convertible Notes in the aggregate principal amount of $5,000,000 and (ii) Series B Senior Secured Bridge Convertible Notes in the aggregate principal amount of $95,000,000 (collectively, the “Notes”) for consideration consisting of (i) cash payments in the aggregate amount of $5,000,000, and (ii) secured promissory notes payable by the buyers to Helios in the aggregate principal amount of $95,000,000 with an aggregate mandatory prepayment obligation in the amount of $2,235,714.29 to be made by the buyers every week beginning November 13, 2017 and every Monday thereafter including December 26, 2017 for an aggregate amount of approximately $20,650,000, including the amounts funded in connection with the Series A Notes.

 

Unless earlier converted or redeemed, the Notes will mature on the second anniversary of the closing date. Helios is required to redeem the Notes (i) at the option of the investor upon seven months following the closing date; (ii) if the Company completes a subsequent public or private offering of debt or equity securities, including equity-linked securities; (iii) upon the occurrence of an Event of Default, including a Bankruptcy Event of Default (each, as defined in the Notes); or (iv) in the event of a Change of Control (as defined in the Notes). With the exception of a redemption required by an Event of Default, which may be paid with cash or shares of Helios common stock at the election of the Buyer, the Helios will be required to redeem the Notes with cash. All amounts outstanding under the Notes will be secured by the Investor Note and all proceeds therefrom.

 

The Company will provide a Guaranty to each of the Buyers pursuant to which it will (i) guarantee the punctual payment of all obligations under the Notes, including all interest, make-whole and other amounts that accrue after the commencement of any insolvency proceeding of the Company, whether or not the payment of such obligations are enforceable or allowable in the insolvency proceeding, and all fees, interest, premiums, penalties, causes of actions, costs, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Financing documents, and (ii) agree to pay any and all costs and expenses (including counsel fees and expenses) incurred by the Buyer in enforcing any rights under the Guaranty or any other Financing document.

 

  14  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Note 8 – Stockholders’ Equity

 

Preferred Stock

 

At September 30, 2017, the authorized preferred stock of the Company consists of 41,753,367 shares of preferred stock, $0.0001 par value, of which 4,510,741 shares have been designated Series Seed Preferred Stock, 486,666 shares have been designated Series Seed-1 preferred stock, 7,632,239 shares have been designated Series A preferred stock, and 29,123,721 shares of Series A-1 preferred stock.

 

Series Seed Preferred Stock (“Series Seed”)

 

Throughout 2011, the Company entered into a Series Seed Preferred Stock purchase agreement for the sale of Series Seed preferred stock of the Company. The Company authorized the issuance and sales of 4,510,741 shares of Series Seed preferred stock, par value $0.0001 per share, at $0.32478 per share, which are convertible into 4,510,741 shares of common stock. The Series Seed is entitled to receive dividends at $0.02598 per share and its liquidation preference is $0.32478 per share.

 

Series Seed-1 Preferred Stock (“Series Seed-1”)

 

Throughout 2011, the Company entered into a Series Seed-1 Preferred Stock purchase agreement for the sale of Series Seed preferred stock of the Company. The Company authorized the issuance and sales of 486,666 shares of Series Seed-1 preferred stock, par value $0.0001 per share, at $0.5349 per share, which are convertible into 486,666 shares of common stock. The Series Seed-1 is entitled to receive dividends at $0.04279 per share and its liquidation preference is $0.5349 per share.

 

Series A Preferred Stock (“Series A”)

 

Throughout 2012 and 2013, the Company entered into a Series A Preferred Stock purchase agreement for the sale of Series A preferred stock of the Company. The Company authorized the issuance and sales of 4,986,736 shares of Series Seed preferred stock, par value $0.0001 per share, at $0.756 per share, which are convertible into 4,986,736 shares of common stock. The Series A is entitled to receive dividends at $0.06048 per share and its liquidation preference is $0.756 per share.

 

Series A-1 Preferred Stock (“Series A-1”)

 

Throughout 2014, the Company entered into a Series A-1 Preferred Stock purchase agreement for the sale of Series A-1 preferred stock of the Company. The Company authorized the issuance and sales of 11,489,356 shares of Series A-1 preferred stock, par value $0.0001 per share, at $0.235 per share, which are convertible into 11,489,356 shares of common stock. The Series A-1 is entitled to receive dividends at $0.01880 per share and its liquidation preference is $0.235 per share

 

The following describes certain information with respect to all series of Preferred Stock:

 

Dividends  – Holders of all Preferred Stock classes shall, in any calendar year, be entitled to receive dividends, when and if declared by the Board of Directors, out of any assets at the time legally available, at an annual rate as set forth above for each share class. These rights are not cumulative, and no right to dividends shall accrue which are not declared or paid. Payment of any dividends to the holders of Preferred Stock shall be on a pro rata, pari passu basis in proportion to the dividend rates for each series of Preferred Stock. There have been no Preferred Stock dividends declared to date.

 

Liquidation  – In the event of any liquidation, holders of all Preferred Stock classes shall be entitled to the liquidation preference per share as set forth above plus any dividends declared but unpaid thereon. If upon the liquidation, dissolution or winding up of the Company, the assets of the Company legally available for distribution to the holders of the Preferred Stock are insufficient to permit the payment to such holders of the full amount of their liquidation preference, then the entire assets of the Company legally available for distribution shall be distributed with equal priority and pro rata among the holders of the Preferred Stock in proportion to the full amounts they would otherwise be entitled to receive.

 

  15  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

Conversion Rate – Each share of each class of Preferred Stock is convertible at the option of the holder, into a number of common stock as determined by dividing the respective Preferred Stock issue price by the conversion price in effect at the time. The initial conversion price of the Series Seed is $0.32478, Series Seed-1 is $0.5349, Series A is $0.756 and Series A-1 is $0.235 and are subject to adjustment in accordance with antidilution provisions. Antidilution provisions kick in when securities are sold at a per-share price below the conversion price that a preferred stockholder paid for their shares (other than securities explicitly excluded from antidilution provisions in the Company’s Articles of Incorporation). The adoption of ASU 2017-11, did not require the Company to account for the down round feature as a derivative liability at fair value. As of September 30, 2017, there have been no sales of securities that would have trigger antidilution.

 

Right of Conversion  –

 

Optional conversion: Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time, and without the payment of additional consideration by the holder thereof, into such number of fully paid and nonassessable shares of Common Stock at the then applicable Conversion Rate, as set forth above.

 

Mandatory Conversion : Each share of Preferred Stock shall automatically be converted into fully-paid, non-assessable shares of Common Stock at the then effective Conversion Rate for such share (i) immediately prior to the closing of a firm commitment underwritten initial public offering “Securities Act”), covering the offer and sale of the Company’s common stock, provided that the aggregate gross proceeds to the Company are not less than $35,000,000, or (ii) upon the receipt by the Company of a written request for such conversion from the holders of a majority of the preferred stock then outstanding (voting as a single class and on an as-converted basis), or, if later, the effective date for conversion, or upon the occurrence of an event, in each case as specified in such requests, provided, however, the Series A-1 Preferred Stock shall not be converted pursuant to (ii) without the prior written consent of a majority of the Series A-1 Preferred Stock then outstanding (each of the events referred to in (i) and (ii) are referred to herein as an “Automatic Conversion Event”).

 

Voting  – On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Preferred Stock shall be entitled to cast the number of votes equal to the number of whole shares of common stock into which the shares of Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the other provisions of the Certificate of Incorporation, holders of Preferred Stock shall vote together with the holders of common stock as a single class. Further, so long as at least 4,686,006 shares (as adjusted for Recapitalizations) of Preferred Stock remain outstanding, the holders of preferred stock, voting as a separate class, shall be entitled to elect two members of the Company’s Board of Directors.

 

Common Stock

 

As of September 30, 2017, the Company has authorized 103,000,000 common shares of $0.0001 par value. Holders of common stock are entitled to one vote for each share held. The Company issued 193,583 common shares in relation to stock option exercises, at $0.048 per share, during the nine months ended September 30, 2017. The Company also issued 2,645,502 common shares in relation to warrant exercises, at $.001 per share, during the nine months ended September 30, 2017.

 

Note 9 – Warrants

 

The Company issued warrants to purchase 2,645,502 shares of common stock that were issued in connection with a loan agreement in April 2014, which was repaid prior to December 31, 2014. The warrants have an exercise price of $0.001 and expire in October 2018. These warrants were exercised during August 2017.

 

During May 2016, the Company issued warrants to purchase shares of the Company’s common stock in connection with a secured convertible promissory note issued to an existing lender who is also a director.  The number of warrants to be issued, with an exercise price of $.01, is equal to (a) 100% of the original principal amount of the secured promissory note ($250,000) divided by (b) the purchase price per share paid by other investors with respect to a majority of the Next Equity Securities (as defined) issued in the Next Equity Financing.  As a result of the warrants not containing an explicit share limit, the warrants were classified as a derivative liability.  The warrant was initially valued at $244,873 based upon the intrinsic value of the warrant multiplied by the probability of a future capital raise using a Monte Carlo simulation valuation methodology. As the total fair value of the financial liabilities that were measured (the secured convertible note, the contingent redemption provision and the warrant issued to this lender/director) was in excess of the net proceeds received, the Company recorded a loss of $244,873 at the origination of this transaction.

 

  16  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

The following assumptions were used to determine the fair value of the warrants for the nine months ended September 30, 2017 and 2016:

 

    Stock
Price
    Expected Term     Dividend     Discount Rate     Volatility  
September 30, 2017   $ 0.24       9.66       0 %     1.579 %     40.7 %
September 30, 2016   $ 0.24       8.66       0 %     2.254 %     40.7 %

 

At September 30, 2017, the fair value of the warrant was $244,748. For the nine months ended September 30, 2017 and 2016, the Company recognized a gain (loss) on the change in the fair value of the warrant of $1,949 and ($971), respectively.

 

Note 10 – Options

 

Stock Option Plans

 

The Company’s Board of Directors (not sure of shareholder date- do we need this?) approved the Company’s 2011 Equity Incentive Plan (the “2011 Plan”) on January 7, 2011. The Plan provides for the grant of up to 1,100,000 shares of common stock for issuance as non-statutory or incentive stock options, stock appreciation rights, restricted stock, restricted stock units to the Company’s employees, Officers, Directors or consultants. The Company’s Board of Directors administers the 2011 Plan, selects the individuals to whom options will be granted, determines the number of options to be granted, and the term and exercise price of each option. Stock options granted pursuant to the terms of the 2011 Plan generally cannot be granted with an exercise price of less than 100% of the fair market value on the date of the grant. The term of the options granted under the 2011 Plan cannot be greater than 10 years. Options vest at varying rates generally over three to five years along with performance based options.

 

In September 2016, the Board of Directors approved the increase in the number of shares issuable pursuant to the 2011 Plan to 46,200,097.

 

The following table reflects options activity for the nine months ended September 30, 2017:

 

          Weighted Average        
    Options for Common     Exercise     Remaining
Contractual
   

Aggregate

Intrinsic

 
    Shares     Price     Term     Value  
Outstanding as of December 31, 2016     17,553,242     $ 0.043       9.62           -  
Granted     5,870,477       0.114                  
Exercised     (193,583 )     0.005                  
Forfeited, cancelled, expired     (1,440,854 )     0.040                  
Outstanding as of September 30, 2017     21,789,282     0.051       9.88     $ 664,189  

 

The Company recognized compensation expense of $84,568 and $52,038 related to stock options for the nine months ended September 30, 2017 and 2016, respectively. These amounts are included in general and administrative expenses in the statement of operations.

 

The fair value of options granted during the nine months ended September 30, 2017 and 2016 was approximately $172,230 and $0, respectively. As of September 30, 2017, there is approximately $142,440 of total unrecognized compensation expense related to unvested stock-based compensation arrangements granted, which cost is expected to be recognized over a weighted average period of 2.75 years, respectively. As of September 30, 2017, there were options to purchase 24,391,382 shares of common stock available for grant under the plan.

 

The following assumptions were used to determine the fair value of stock options granted under the Company’s stock-based compensation plan using the Black-Scholes pricing model: stock price: $.24 - $.08, expected term: 3.6 – 5.0 years, dividend yield: 0%, discount rate: 1.75% - 2.0%, volatility: 45.69% - 48.10%.

 

  17  

 

 

MoviePass Inc.

Notes to Financial Statements

Nine Months Ended September 30, 2017 and 2016

(unaudited)

 

The following table summarizes additional information regarding outstanding and exercisable options under the stock option plans at September 30, 2017:

 

      Vested Options outstanding     All Options Outstanding  
            Weighted
Average
    Aggregate           Weighted
Average
    Aggregate  
Exercise
Price
    Number of
Options
    Remaining
Term
    Intrinsic
Value
    Number of Options     Remaining
Term
    Intrinsic
Value
 
$ 0.240       241,818       6.44     $ -       241,818       6.44     $ -  
$ 0.040       8,805,673       9.82     $ 352,227       16,308,570       9.81     $ 652,343  
$ 0.048       350,198       5.32     $ 11,206       370,198       5.47     $ 11,846  
$ 0.080       1,808,120       10.62     $ -       4,868,696       10.62     $ -  
  Total       11,205,809                       21,789,282                  

 

Note 11 – Income Taxes

 

The provision for income taxes is composed of current and deferred components. The current component represents the amount of federal and state income taxes that are currently reportable to the respective tax authorities and is measured by applying statutory rates to the Company’s taxable income as reported in its income tax returns.

 

The Company’s effective tax rate differs from the expected federal statutory rate primarily due to the increase in net deferred tax assets for which a full valuation allowance has been recorded.

 

Deferred income taxes are provided for the tax effects of temporary differences in the reporting of income for consolidated financial statements and income tax reporting purposes.

 

Note 12 – Commitments and Contingencies

 

Office Lease Agreements

 

On August 1, 2014 the Company signed a lease for office space in New York, New York. The lease amount is partially based on the number of employees allowed access to the leased space. The lease does not have an expiration date but is subject to annual increases. The current monthly rental fee is approximately $5,900.

 

Legal Proceedings

 

In the ordinary course of business, the Company from time to time is involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the Company’s financial condition and/or results of operations. However, in the opinion of management, other than as set forth herein, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the Company’s financial position or results of operations.

 

Note 13 – Subsequent Events

 

The Company has evaluated subsequent events through November 29, 2017, the date that these financial statements were available to be issued.

 

 

18

 

 

Exhibit 99.3

 

Unaudited Pro Forma Condensed Combined Financial Information

 

On November 9, 2016 the Company merged with Zone Technologies Inc. (“Zone”) and issued 1,740,000 shares of its common stock as merger consideration which represented an exchange ratio of 0.174 shares of the Company’s common stock for each share of Zone common stock outstanding with Zone surviving the merger as the Company’s wholly-owned subsidiary. The Company has included pro forma information for Zone within the year ended December 31, 2016 statements of operations to reflect Zone pre acquisition activity for the period of January 1, 2016 through November 8, 2016.

 

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 51% of the then outstanding shares of MoviePass’ common stock for an aggregate purchase price of up to $27,000,000 (the “MoviePass Transaction”). At the closing, and for the purpose of this acquisition, all of MoviePass’ investor debt and accrued interest are converted into one class of common stock.

  

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 MoviePass Transaction, to the purchase of additional shares of the then-outstanding MoviePass common stock. As a result of the additional investment, the maximum purchase price payable by the Company increased from $27,000,000 to $28,500,000. Upon the closing of the MoviePass Transaction, the Company will receive shares of common stock of MoviePass totaling 51.71% of the then-outstanding shares of MoviePass common stock, in addition to shares of MoviePass common stock issuable upon conversion of the Kelly Note (as defined in the MoviePass SPA) amounting to 2% of the outstanding shares of MoviePass common stock on a post-transaction basis, for a total ownership percentage of 53.71%.

 

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 $20,000,000 based on a pre-money valuation of MoviePass of $210,000,000 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 MoviePass Transaction.

 

On August 15, 2017, pursuant to a Securities Purchase Agreement entered into by the Company and an institutional investor (“Investor”) the Company agreed to sell and issue Senior Secured Convertible Notes to the Investor in the aggregate principal amount of $10,300,000 and on November 7, 2017, pursuant to a Securities Purchase Agreement entered into by the Company and certain institutional investors, the Company completed an offering of a new series of Senior Convertible Notes in the aggregate principal amount of $100,000,000. The pro forma reflects approximately $27,000,000 of the proceeds received from the notes issued in August 2017 and November 2017 as being used to finance the MoviePass Transaction.

 

The following unaudited pro forma condensed combined financial information is based on the Company’s historical consolidated financial statements and MoviePass’ historical consolidated financial statements as adjusted to give effect to the proposed acquisition by the Company of a majority financial stake in MoviePass including the financing thereof. The unaudited pro forma condensed combined statements of operations for the nine months ended September 30, 2017 and the 12 months ended December 31, 2016 give effect to the MoviePass Transaction as if it had occurred on January 1, 2016. The unaudited pro forma condensed combined balance sheet as of September 30, 2017 gives effect to the MoviePass Transaction as if it had occurred on September 30, 2017.

 

The pro forma combined financial statements do not necessarily reflect what the combined company’s financial condition or results of operations would have been had the MoviePass Transaction occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the combined company. The actual financial position and results of operations may differ significantly from the pro forma amounts reflected herein due to a variety of factors.

 

 

 

 

Unaudited Pro Forma Condensed Combined Statements of Operations

Year Ended December 31, 2016

 

    Helios and Matheson Analytics Inc.     Zone Technologies, Inc
for the period from January 1, 2016 to the November 9, 2016 date of acquisition
    Pro forma results adjusted for acquisition of Zone Technologies, Inc     MoviePass     Adjustments     Notes   Combined  
                                         
Revenues   $ 6,759,700     $ -     $ 6,759,700     $ 8,692,337     $ -         $ 15,452,037  
Revenues - other     -       -       -       20,212       -           20,212  
Total revenues     6,759,700       -       6,759,700       8,712,549       -           15,472,249  
                                                     
Cost of sales     4,860,927       -       4,860,927       9,780,214       -           14,641,141  
Cost of sales - other     -       -       -       1,506       -           1,506  
Total cost of sales     4,860,927       -       4,860,927       9,781,720       -           14,642,647  
Gross margin/(loss)     1,898,773       -       1,898,773       (1,069,171 )     -           829,602  
Operating expenses:                                                    
General and administrative expenses     3,424,463       1,246,543       4,671,006       3,521,296       -           8,192,302  
Research and development     311,266       304,263       615,529       -       -           615,529  
Depreciation and amortization     259,379       -       259,379       148,113       2,779,376     3     3,186,868  
Total operating expenses     3,995,108       1,550,806       5,545,914       3,669,409       2,779,376           11,994,699  
                                                     
Loss from operations     (2,096,335 )     (1,550,806 )     (3,647,141 )     (4,738,580 )     (2,779,376 )         (11,165,097 )
                                                   
Other income (expense):                                                  
Change in fair value of warrant liability     -       -       -       (1,824 )     (3,755,084   7     (3,756,908
Change in fair value of derivative liability     (107,249 )     -       (107,249 )     148,482       ( 5,082,270 )   7     (5,041,037 )
Interest expense     (5,210,413 )     -       (5,210,413 )     (324,443 )     (4,069,244 )     9     ( 12,520,657 )
                      -               (3,241,000   8        
                                      324,443     4        
Interest income     18,261       -       18,261       -       -           18,261  
Total other expense, net     (5,299,401 )     -       (5,299,401 )     (177,785 )     (15,823,155 )           (21,300,341 )  
Loss before provision for income taxes     (7,395,736 )     (1,550,806 )     (8,946,542 )     (4,916,365 )     (18,602,531         (32,465,438 )
                                                     
Income tax benefit/(provision)     14,665       -       14,665       -       -           14,665  
Net loss     (7,381,071 )     (1,550,806 )     (8,931,877 )     (4,916,365 )     (18,602,531 )           (32,450,773 )
                                                     
Net loss attributable to noncontrolling interest     -       -       -       -       (2,770,871   12     (2,770,871
Other comprehensive income/(loss)     13,721       -       13,721       -       -           13,721  
                                                     
Net income attributable to common shareholders   $ (7,367,350 )   $ (1,550,806 )   $ (8,918,156 )   $ (4,916,365 )   $ (15,831,660       $ (29,666,181 )
                                                     
Net loss per share                                                    
Basic and Diluted   $ (2.74 )           $ (3.32 )                       $ (4.43 )
                                                     
Weighted average shares     2,691,448               2,691,448               4,000,000     1     6,691,448  

 

 

 

 

Unaudited Pro Forma Condensed Combined Statements of Operations

Nine Months Ended September 30, 2017

 

    Helios and Matheson Analytics Inc.     MoviePass     Pro Forma Adjustments     Notes   Pro Forma Combined  
                             
Revenues   $ 3,672,036     $ 4,967,689     $ -         $ 8,639,725  
Revenues - other     -       660       -           660  
Total revenues     3,672,036       4,968,349       -           8,640,385  
                                     
Cost of sales     2,969,357       9,592,336       -           12,561,693  
Cost of sales - other     -       20,527       -           20,527  
Total cost of sales     2,969,357       9,612,863       -           12,582,220  
Gross margin/(loss)     702,679       (4,644,514 )     -           (3,941,835 )
Operating expenses:                                    
General and administrative expenses     8,023,886       5,208,615       -           13,232,501  
Research and development     1,555,095       -       -           1,555,095  
Depreciation and amortization     1,302,381       86,658       2,084,532     3     3,473,571  
Total operating expenses     10,881,362       5,295,273       2,084,532           18,261,167  
                                     
Loss from operations     (10,178,683 )     (9,939,787 )     (2,084,532 )         (22,203,002 )
                                     
Other income (expense):                                    
Change in fair value of warrant liability     (17,038,711 )     1,949       17,325,770     5     (20,674,281 )
                      (20,963,289 )   7        
Change in fair value of derivative liability     (10,434,611 )     (1,358,977 )     5,893,606     5     (42,955,562 )
                      (37,055,580 )   7        
Loss on the extinguishment of the December Note     (683,885 )     -       -           (683,885 )
Interest expense     (16,856,284 )     (400,046 )     (2,430,750 )   5     (19,219,159 )
                      67,875     5        
                      400,046     4        
Interest income     51,695       -       -           51,695  
Total other expense, net     (44,961,796 )     (1,757,074 )     (36,762,322 )         (83,481,192 )
Loss before provision for income taxes     (55,140,479 )     (11,696,861 )     (38,846,854 )         (105,684,194 )
                                     
Income tax benefit/(provision)     (39,110 )     -       -           (39,110 )
Net loss     (55,179,589 )     (11,696,861 )     (38,846,854 )         (105,723,304 )
                                  -  
Net loss attributable to noncontrolling interest                     (5,030,048 )   12     (5,030,048 )
Other comprehensive income/(loss)     (6,066 )     -       -           (6,066 )
                                     
Net income attributable to common shareholders   $ (55,185,655 )   $ (11,696,861 )   $ (33,816,806 )       $ (100,699,322 )
                                     
Net loss per share                                    
Basic and Diluted   $ (8.35 )                       $ (9.49 )
                                     
Weighted average shares     6,607,149               4,000,000     1     10,607,149  

 

  2  

 

 

Unaudited Pro Forma Condensed Combined Balance Sheet

Unaudited Pro Forma Condensed Combined Balance Sheet As of September 30, 2017

 

    Helios and Matheson Analytics Inc.     MoviePass     Pro Forma Adjustments     Notes   Pro Forma Combined  
Assets                            
Current assets:                            
Cash   $ 1,663,879     $ 3,341,247     $ (16,000,000 )   1   $ 2,955,126  
                      (20,000,000 )   2        
                      6,970,000     6        
                      26,980,000     6        
Accounts receivable, net     254,930       273,315       -           528,245  
Unbilled receivables     48,595       -       -           48,595  
Note receivable - MoviePass     5,000,000       -       (5,000,000 )   1     -  
Prepaid expenses     707,868       71,148       -           779,016  
Total current assets     7,675,272       3,685,710       (7,050,000 )         4,310,982  
Other assets                                    
Property and equipment, net     134,705       40,251       -           174,956  
Intagible assets, net     4,915,816       -       11,208,000     1     16,123,816  
                                     
Goodwill     4,599,969       -       82,958,873     1     92,558,842  
                      5,000,000     1        
Other assets     139,012       8,000       -           147,012  
Domain names     -       25,965       -           25,965  
Total assets   $ 17,464,774     $ 3,759,926     $ 92,116,873         $ 113,341,573  
Liabilities and Shareholders' Equity (Deficit)                                    
Current liabilities:                                    
Accounts payable and accrued expenses   $ 2,481,201     $ 2,259,453     $ 1,120,910     4   $ 5,861,564  
Derivative liability     14,670,153       -       35,806,867     5     50,477,020  
Accrued interest     57,817       842,696       (842,696 )   1     57,817  
Gift card liabilities     -       21,784       -           21,784  
Deferred revenue     -       4,257,858       -           4,257,858  
Warrant liability     23,952,727       244,748       2,629,162     5     26,826,637  
Convertible notes payable     381,244       9,477,188       (34,285,215 )   10     381,244  
                      6,970,000     6        
                      26,980,000     6        
                      335,215     11        
                      (9,477,188 )   1        
Total current liabilities     41,543,142       17,103,727       29,237,055           87,883,924  
Long term liabilities                                    
Convertible notes payable     -       8,156,970       (8,156,970 )   1     -  
Total liabilities     41,543,142       25,260,697       21,080,085           87,883,924  
                                     
Commitments and Contingencies                            
                                     
Redeemable common stock, $.01 par value; 841,250 shares issued and outstanding that can be converted to Senior Secured Convertible Notes as of September 30, 2017 for a redemption amount of $2,523,700     2,097,867       -       -           2,097,867  
                                     
Stockholders' equity (deficit):                                    
Preferred stock     -       2,148       (2,148 )   1     -  
Common stock     85,445       1,296       40,000     1     125,445  
                      (1,296 )   1        
Additional paid-in capital, plus Redeemable CS 841,250 Shares     72,445,147       9,128,137       51,720,013     1     108,493,492  
                      (15,671,668 )   2        
                      (9,128,137 )   1        
Other comprehensive income     (113,057 )     -       -           (113,057 )
Accumulated deficit     (98,593,770 )     (30,632,352 )     30,632,352     1     (104,200,709 )
                      (1,456,125 )   4, 5        
                      (4,150,814 )   5        
Total Helios stockholders' equity (deficit)     (26,176,235 )     (21,500,771 )     51,982,177           4,305,171  
                                     
Non-controlling interest     -       -       23,382,943     1     19,054,611  
                      (4,328,332 )   2        
Total shareholders’ equity (deficit)     (26,176,235 )     (21,500,771 )     71,036,788           23,359,782  
                                     
Total liabilities, redeemable common stock and shareholders’ equity (deficit)   $ 17,464,774     $ 3,759,926     $ 92,116,873         $ 113,341,573  

 

  3  

 

 

1 In consideration of the interests, the Company purchased a 53% stake of MoviePass, Inc. which comprised of 666,666 milestone contingent shares of HMNY common stock, 3,333,334 shares of HMNY common stock of share based consideration, and $15,000,000 in cash consideration. At closing, the Company will deliver the remainder of the cash not already prepaid in the form of a convertible note receivable sent to MoviePass prior to the close of the acquisition and the share based consideration. The milestone contingent shares were based upon MoviePass within one year after the Closing, obtaining subscribers to MoviePass’ MoviePass product in excess of at least one day 150,000 subscribers, and the common stock shall have been listed on The Nasdaq Stock Market or New York Stock Exchange by January 31, 2018.  As of September 30, 2017, MoviePass had already achieved the number of daily subscribers and therefore the contingency had been fully satisfied.

 

  Cash and Cash Equivalents   $ 15,000,000  
  Common shares (4,000,000 shares at $0.01 par)     40,000  
  Note Payable     1,000,000  
  Additional Paid in Capital (4,000,000 shares at $12.93 per share)     51,720,013  
  Total Consideration   $ 67,760,013  
           
  Fair Value of Assets Acquired and Liabilities Assumed        
  Cash and Cash Equivalents   $ 3,341,247  
  Accounts Receivable, net     273,315  
  Prepaid expenses     71,148  
  Property and Equipment     40,251  
  Other Assets     8,000  
  Domain names     25,965  
  Trade Name and Trademarks     2,859,000  
  Developed Technology     6,555,000  
  Customer Relationships     1,520,000  
  Non-Competition Agreements     274,000  
  Accounts Payable     (1,504,384 )
  Accrued Expenses     (755,069 )
  Gift Card Liabilities     (21,784 )
  Deferred Revenue     (4,257,858 )
  Warrant Liability     (244,748 )
  Total Fair Value of Assets Acquired and Liabilities Assumed   $ 8,184,083  
           
  Non Controlling Interest (at Fair Value)   $ 23,382,943  
           
  Goodwill   $ 82,958,873  

 

  In preparing the pro forma financial information an estimated expected purchase price was based on its closing market price on the November 17, 2017 of $12.94. In addition, the Company has included the following sensitivity analysis of the purchase price and goodwill to changes in the price of the Company’s common stock.

 

      Purchase Price     Estimated Goodwill  
  As presented in the pro forma combined results   $ 67,760,013     $ 82,958,873  
  10% increase in common stock price   $ 71,836,014     $ 87,034,874  
  10% decrease in common stock price   $ 66,760,013     $ 81,958,873  

 

  In preparing the pro forma financial information, Management assigned an estimated fair value to the noncontrolling interest. This fair value is based on the estimated value of MoviePass at the time which the acquisition was announced, August 15, 2017. As of August 15, 2017, the original valuation of MoviePass was estimated to be approximately $49,700,000 and the percentage ownership by noncontrolling interest was 47%. The fair value assigned to the noncontrolling interest takes into consideration a premium associated with the controlling interest, in addition to the fair value of the net assets of MoviePass, which resulted in an estimated initial value of $23,400,000
   
  When assigning a preliminary fair value to the Deferred Revenue of MoviePass, Management noted that upon review of the MoviePass audited financial statements, the costs to satisfy this obligation are at least, if not greater than, the value than the revenue recognized and recorded as deferred. At this time, the final costs to satisfy the obligation are not fully known, therefore Management has recorded Deferred Revenues at the book value, which is deemed to be an appropriate estimate of fair value.
   
  To record the additional investment of MoviePass purchased by the Company subsequent to the initial 53% acquisition. The additional investment is to acquire an additional 8.7% of MoviePass for $20,000,000 in cash. The additional 8.7% investment results in a reduction to the carrying value of the noncontrolling interest of $4,328,322. The excess of the purchase price of $20,000,000 over the carrying value of the non controlling interest results in an adjustment to Additional Paid in Capital of $15,671,668.
   
2 To record the additional investment of MoviePass purchased by the Company subsequent to the initial 53% acquisition. The additional investment is to acquire an additional 8.7% of MoviePass for $20,000,000 in cash.

 

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3 Adjustments represent the amortization expense related to the identifiable intangible assets acquired in MoviePass of $2,779,368 for the year ended December 31, 2016 and $2,084,526 for the nine months ended September 30, 2017. Amortization expense is recognized on a straight line basis over the useful life of the intangible assets.  The useful life of the MoviePass intangible assets are as follows:

 

  Intangible assets   Useful Life  
  Trade Name and Trademarks     10  
  Developed Technology     3  
  Customer Relationships     7  
  Non-Competition Agreements     3  

 

  To adjust for financing costs related to expenses incurred in conjunction with the MoviePass acquisition. These costs specifically relate to the Company obtaining the financing necessary to complete the acquisition of MoviePass and are considered to be recurring in nature, as they pertain to interest expense, accretion of debt discounts, and gain/loss on warrant and derivative instruments which the Company will continue to incur beyond the date of acquisition.
   
4 For the 9 months ended September 30, 2017 $32,075,452 costs had been incurred and recorded within  the Company's Statement of Operations and reflected as part of Derivative Liability, Warrant Liability, and Convertible Notes Payable balances on the September 30, 2017 Balance Sheet. Costs reflected within the 9 months ended September 30, 2017 Statement of Operations were reversed and the corresponding interest expense, accretion of debt discounts, and gain/loss on warrant and derivative instruments were instead recorded as if the acquisition occurred on January 1, 2016. Costs reflected within the September 30, 2017 Balance Sheet were adjusted to remove the effects of interest accreted on the convertible notes for the 9 months ended September 30, 2017 as these costs would not have been incurred on the first day of the transaction.
   
5 To adjust for transaction costs related to expenses incurred in conjunction with the MoviePass acquisition. As these costs specifically relate to accounting and legal expenses and are considered to be non-recurring, Management has determined that they should not be included in the pro forma Statement of Operations presented. As such, for the $1,362,818 of transaction costs recorded within the 9 month ended September 2017 Statement of Operations, an adjustment will be recorded to remove these costs from Interest Expense. For the $1,120,909 of transaction costs incurred after September 30, 2017, an adjustment will be recorded to reflect these expenses within Accrued Expenses and Retained Earnings within the September 30, 2017 Balance Sheet.
   
6 Adjustment to record debt incurred in conjunction with securing the MoviePass acquisition which was secured subsequent to September 30, 2017.
   
7 Adjustments represent the change in fair market value of the Company's derivative and warrant liabilities recongized with the additional financing that the Company secured to acquire a majority stake in MoviePass.
   
8 Adjustment to record interest expense related to the notes issued in August 2017 and November 2017 as being used to finance the MoviePass transaction.
   
9 Adjustment to record accretion expense related to the discount due to the derivatives incurred in conjunction with the notes issued in August 2017 and November 2017 as being used to finance the MoviePass transaction..
   
10 Adjustment to record the derivative liability as a discount against the convertible note payable balance.
   
11 Adjustment to remove the accretion expense recorded in conjunction with the notes issued in August 2017 for the 9 months ended September 30, 2017.
   
12 Adjustment to net income to record portion attributable to noncontrolling interest. When considering the initial purchase of MoviePass of 53.71%, increased to reflect the additional investment of 8.7%, the total non controlling interest portion amounts to 37.59%.

 

 

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