Notes to Condensed Consolidated Financial Statements

The accompanying unaudited condensed interim consolidated financial statements (“interim statements”) of Helios and Matheson Analytics Inc. (“Helios and Matheson”, “HMNY” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim statements have been included. The results reported in these interim statements are not necessarily indicative of the results that may be reported for the entire year. The consolidated balance sheet as of December 31, 2017 was derived from the audited consolidated financial statements as of and for the year ended December 31, 2017. These interim statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2017. 

Business

Since 1983, the Company has provided high quality information technology, or IT, services and solutions including a range of technology platforms focusing on big data, business intelligence, and consumer-centric technology. More recently, to provide greater value to stockholders, the Company has sought to expand its business primarily through acquisitions that leverage its capabilities and expertise.

On November 9, 2016, the Company acquired Zone Technologies, Inc., a Nevada corporation (“Zone”), a state-of-the-art mapping and spatial analysis company. On December 11, 2017, the Company acquired a majority interest in MoviePass Inc., a Delaware corporation (“MoviePass”), whose primary product offering is MoviePass™, the nation’s premier movie theater subscription service. MoviePass provides subscribers with access to movie titles in theaters, subject to the MoviePass terms of use, at a fixed monthly, quarterly, semi-annual or annual fee.

In January 2018, the Company formed the Company’s wholly-owned subsidiary, MoviePass Ventures LLC, a Delaware limited liability company (“MoviePass Ventures”), which aims to collaborate with film distributors to share in film revenues while using the data analytics that MoviePass offers for marketing and targeting services reaching MoviePass’ paying subscribers using the platform.

In April 2018, the Company acquired the Moviefone brand and related assets (“Moviefone”). Moviefone is an entertainment information and marketing service which provides its users with access to the entire entertainment ecosystem. Moviefone delivers movie show times and tickets, trailers, TV schedules, streaming information, cast and crew interviews, photo galleries and more. Moviefone’s editorial coverage includes up-to-date entertainment news, trailers and clips, red-carpet coverage and celebrity features.

On May 15, 2018 the Company formed MoviePass Films LLC, a Delaware limited liability company (“MoviePass Films”) to focus on studio-driven content and new film production for theatrical release and other distribution channels. On May 23, 2018, the Company executed a binding letter of intent (the “LOI”) with Emmett Furla Oasis Films LLC (“EFO”) pursuant to which EFO acquired a 49% membership interest in MoviePass Films.

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. The condensed consolidated financial statements include all accounts of the Company and its wholly owned and majority owned subsidiaries. The Company consolidates entities in which it owns more than 50% of the voting equity interests and controls operations. All intercompany transactions and balances among consolidated subsidiaries have been eliminated. The Company consolidated the operations of MoviePass as of December 11, 2017, Moviefone as of April 4, 2018, MoviePass Ventures as of January 2018 and MoviePass Films as of May 15, 2018.

Reverse Stock-Split

On July 24, 2018, the Company effected a reverse stock-split of its issued and outstanding common stock at a ratio of one-for-250 (“Reverse Stock Split”). The Company filed a  Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware effecting the Reverse Stock Split. The Reverse Stock Split did not affect the number of authorized shares of common stock, which, following the increase in authorized shares effected on July 23, 2018 discussed in Note 11, remains at 5,000,000,000 shares. A proportionate adjustment was made to (i) the per share exercise price and the number of shares issuable upon the exercise or conversion of the Company’s outstanding equity awards, options and warrants to purchase shares of common stock and outstanding convertible notes and (ii) the number of shares reserved for issuance pursuant to the Company’s 2014 Equity Incentive Plan. The accompanying condensed consolidated financial statements and notes give retroactive effect to the Reverse Stock Split for all periods presented.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include, but are not limited to, allowance for doubtful accounts, purchase accounting allocations, recoverability and useful lives of property, plant and equipment, identifiable intangibles and goodwill, warrant liabilities, derivative liabilities, the valuation allowance of deferred taxes, contingencies and equity compensation. Actual results could differ from those estimates.

Reclassification

Certain prior period amounts have been reclassified to conform to current period presentation.

Revenue Recognition

ASC 606 Revenue from Contracts with Customers (“ASC 606”)

The Company adopted the new revenue standard, ASC 606, using the modified retrospective method with respect to all non-completed contracts as of January 1, 2018. This method required retrospective application of the new accounting standard to all unfulfilled contracts that were outstanding as of January 1, 2018. Revenues and contract assets and liabilities for contracts completed prior to January 1, 2018 are presented in accordance with ASC 605.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Company has determined that there were no adjustments required with respect to the adoption of ASC 606 with respect to any prior periods.

The following is a description of the principal activities from which the Company generates revenue, including from consulting customers and subscribers.

Consulting Revenue

Consulting revenues are recognized as services are provided. The Company primarily provides consulting services under time and material contracts, whereby revenue is recognized as hours and costs are incurred. Clients for consulting revenues are billed on a weekly or monthly basis. Revenues from fixed fee contracts are recorded when work is performed on the basis of the proportionate performance method, which is based on costs incurred to date relative to total estimated costs. Any anticipated contract losses are estimated and accrued at the time they become known and estimable. Unbilled accounts receivables represent amounts recognized as revenue based on services performed in advance of customer billings. Revenue from sales of software licenses is recognized upon delivery of the software to a customer because future obligations associated with such revenue are insignificant.

Subscription Revenue

Subscription revenue consists primarily of subscription fees for monthly, quarterly, semi-annual or annual subscriptions. Revenue from subscriptions is recognized on a straight-line basis when the performance obligations to provide each service for the period are satisfied, which is over time as subscription services can be used by subscribers at any time. Consumers purchasing subscriptions generally pay on an annual or monthly basis, and any prepaid amounts for subscription services are recorded as deferred revenue and amortized to revenue evenly over the service period which begins once a subscriber has activated his or her subscription.

Marketing and Promotional Services

The Company also generates revenue from marketing services primarily related to major motion picture releases. Marketing revenue is generated through e-mail and digital advertising to the Company’s subscriber base and pursuant to a contract for such services with the movie distributor. Such agreements are short-term and are generally represented by a fully executed customer agreement. Revenue is recognized as performance obligations are satisfied which generally occurs within a month of the date the contract begins. Payment terms on marketing agreements vary and payment is generally due once the performance obligations have been satisfied. Revenue from our participation in the theatrical release of feature films is recognized as earned based on our share of the ultimate expected revenue.

Deferred Revenue

Subscription fees are generally paid in advance by credit card through merchant processors. Subscription fees received in advance of completion of the performance obligations are recorded as deferred revenue until such time the services are provided to the customer.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Goodwill

The Company reviews goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of a triggering event. The Company performs reviews of each of its operating divisions that have goodwill balances. Generally, fair value is determined using a multiple of earnings, or discounted projected future cash flows, and is compared to the carrying value of a reporting unit for purposes of identifying potential impairment. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. Goodwill impairment is recognized for any excess of the carrying value of the reporting unit’s goodwill over the fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

The identification of relevant events and circumstances and how these may impact a reporting unit’s fair value or carrying amount involve significant judgments by management. These judgments include the consideration of the general economic outlook, industry and market considerations, cost factors, overall financial performance, events which are specific to the Company, and trends in the market price of the Company’s common stock. Each factor is assessed to determine whether it impacts the impairment test as well as the magnitude of any such impact. For the three and six months ended June 30, 2018 and 2017, the Company did not record an impairment on goodwill.

Intangible Assets, net

Intangible assets consist of customer relationships, technology, trademarks, broker relationships and patents. Applicable long-lived assets are amortized or depreciated on the straight-line method over their useful lives ranging from three to twelve years.

The Company recorded amortization expense of $1,357,467 and $426,651 for the three months ended June 30, 2018 and 2017, respectively, and $2,613,326 and $853,302 for the six months ended June 30, 2018 and 2017, respectively.

The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information and expected growth rates, to the respective carrying value. If the Company identifies impairment for long-lived assets to be held and used because the carrying value is greater than the projected undiscounted cash flows, the Company compares the assets’ current carrying value to the assets’ fair value. Fair value is based on current market values or discounted future cash flows. The Company records impairment when the carrying value exceeds the assets’ fair value. With respect to owned property and equipment held for disposal, the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal.

The Company did not record impairment charges in regard to definite-lived intangible assets for the three and six months ended June 30, 2018 and 2017.

Research and Development

Research and development costs are charged to operations when incurred and are included in operating expenses.

Stock Based Compensation

The Company follows the fair value recognition provisions in ASC Topic 718, Stock Compensation (“ASC 718”) and the provisions of ASC Topic 505, Equity (“ASC 505”) for stock-based transactions with non-employees. Stock based compensation expense for employees is recognized over the requisite service period based on the estimated grant-date fair value of the awards. The Company accounts for forfeitures as they occur. The grant date is the date at which an employer and employee reach a mutual understanding of the key terms and conditions of a share-based payment award. Stock-based compensation for non-employee stock options is recorded over the vesting period and remeasured at fair value until they vest.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Fair Value Measurements

ASC Topic 820, Fair Value Measurement and Disclosures , defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1: Observable inputs such as quoted prices (unadjusted) in an active market for identical assets or liabilities.

Level 2: Inputs other than quoted prices that are observable, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Level 3: Unobservable inputs that are supported by little or no market activity; therefore, the inputs are developed by the Company using estimates and assumptions that the Company expects a market participant would use, including pricing models, discounted cash flow methodologies, or similar techniques.

The carrying value of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable and accrued expenses approximate fair value because of the short-term maturity of these financial instruments.

The liabilities in connection with the conversion and make-whole features included within certain of the Company’s convertible notes payable and warrants are each classified as a level 3 liability.

Derivative Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates its convertible notes and warrants to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Paragraph 815-10-05-4 of the FASB ASC and Paragraph 815-40-25 of the Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities are classified in the balance sheet as current or non-current to correspond with its host instrument.

The Company marks to market the fair value of the embedded derivatives at each balance sheet date and records the change in the fair value of the embedded derivatives as other income or expense in the statements of operations.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Company utilizes a Monte Carlo Method that values the liability of the debt conversion feature derivative financial instruments and derivative warrants based on a probability of a down round event. The reason the Company selected the lattice binomial model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models.

Warrant Liability

The Company evaluates its warrants to determine if those contracts qualify as liabilities in accordance with ASC 480-10 and ASC 815-40. The result of this accounting treatment is that the fair value of the warrant liability is marked-to-market each balance sheet date and recorded as a liability, with the change in fair value recorded in the statements of operations as other income or expense. Upon conversion or exercise of a warrant liability, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

For warrants with a fixed conversion price and a fixed number of shares, the Company utilizes a Black Scholes model for valuation. For warrants with variability in the number of shares or conversion price (such as a down round feature), the Company utilizes the Monte Carlo Method to value the warrant liability. The reason the Company selected the lattice binomial model is that in many cases there may be multiple embedded features or the features may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models.

Accounting for Film Costs

We capitalize costs of acquiring participation rights to films. The costs for an individual film are amortized to direct operating expenses in the proportion that current year’s revenues bear to management’s estimates of the ultimate revenue at the beginning of the current year expected to be recognized from the distribution, exhibition or sale of such film. Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release of the motion picture. For participation rights previously released films acquired as part of a library, ultimate revenue includes estimates over a period not to exceed twenty years from the date of acquisition.

Due to the inherent uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates may differ from actual results and are likely to differ to some extent in the future from actual results. In addition, in the normal course of our business, some films and titles are more successful or less successful than anticipated. Management regularly reviews and revises when necessary its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and/or write-down of all or a portion of the unamortized costs of the film to its estimated fair value. Management estimates the ultimate revenue based on experience with similar titles or title genre, the general public appeal of the cast, actual performance (when available) at the box office or in markets currently being exploited, and other factors such as the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews, general economic conditions and other tangible and intangible factors, many of which we do not control and which may change.

An increase in the estimate of ultimate revenue will generally result in a lower amortization rate and, therefore, less film amortization expense, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher film amortization expense, and could also periodically result in an impairment requiring a write-down of the film cost to the title’s fair value. These write-downs are included in amortization expense within cost of revenues in our consolidated statements of operations.

Investment in films is stated at the lower of amortized cost or estimated fair value. Additional amortization is recorded in the amount by which the unamortized costs exceed the estimated fair value of the film. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of investment in films may be required as a consequence of changes in our future revenue estimates.

Recent Accounting Pronouncements

The following accounting standards updates were recently issued and have not yet been adopted. These standards are currently under review to determine their impact on the consolidated balance sheets, consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows.

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases, (“ASU 2016-02”), which supersedes FASB ASC 840, Leases and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. In July 2018, the FASB issued ASU 2018-10,  Codification Improvements to Topic 842 (Leases) , and ASU 2018-11,  Leases (Topic 842), Targeted Improvements , which provide (i) narrow amendments to clarify how to apply certain aspects of the new lease standard, (ii) entities with an additional transition method to adopt the new standard, and (ii) lessors with a practical expedient for separating components of a contract. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company is currently evaluating the method of adoption and the impact of adopting ASU 2016-02 on its results of operations, cash flows and financial position.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (“ASC 740”): Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”), which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently in the process of evaluating the impact of ASU 2016-16 on its consolidated financial statements.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

In January 2017, the FASB issued ASU 2017-04 Intangibles-Goodwill and Other (“ASC 350”): Simplifying the Accounting for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests for fiscal years beginning after December 15, 2019 and an entity should apply the amendments of ASU 2017-04 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the effects of ASU 2017-04 on its consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11 (“ASU 2017-11”), Earnings Per Share (“ASC 260”), Distinguishing Liabilities from Equity (“ASC 480”), and Derivatives and Hedging (“ASC 815”). ASU 2017-11 is intended to simplify the accounting for financial instruments with characteristics of liabilities and equity. Among the issues addressed are: (i) determining whether an instrument (or embedded feature) is indexed to an entity’s own stock; (ii) distinguishing liabilities from equity for mandatorily redeemable financial instruments of certain nonpublic entities; and (iii) identifying mandatorily redeemable non-controlling interests. ASU 2017-11 is effective for the Company on January 1, 2019. The Company is currently evaluating the potential impact of ASU 2017-11 on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). The amendments in ASU 2018-07 expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-07 on the Company’s consolidated financial statements.

In evaluating the Company’s ability to continue as a going concern, management considered the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the Company’s interim financial statements were issued (August 14, 2018). Management considered the Company’s current financial condition and liquidity sources, including current funds available, forecasted future cash flows and the Company’s conditional and unconditional obligations due before August 14, 2019.

The Company is subject to a number of risks similar to those of other big data technology, technology consulting companies and subscription based businesses, including its dependence on key individuals, uncertainty of product development and generation of revenues and positive cash flow, dependence on outside sources of capital, risks associated with research, development, testing, and successful protection of intellectual property, the Company’s ability to maintain and grow its subscriber base and the Company’s susceptibility to infringement on the proprietary rights of others. The attainment of profitable operations is dependent on future events, including obtaining adequate financing to fulfill the Company’s growth and operating activities and generating a level of revenues adequate to support the Company’s cost structure.

The Company has experienced net losses and significant cash outflows from cash used in operating activities over the past years. As of June 30, 2018, the Company had an accumulated deficit of $247,654,083, a loss from operations for the three and six months ended June 30, 2018 of $126,638,859 and $234,370,852, respectively, and net cash used in operating activities for the six months ended June 30, 2018 of $219,209,083.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Company expects to continue to incur net losses and have significant cash outflows for at least the next twelve months. As of June 30, 2018, the Company had cash and a working capital deficit of $15,512,810 and $84,898,641, respectively, compared to $24,949,393 and $107,097,249 as of December 31, 2017. Of the working capital deficit at June 30, 2018, $45,803,154 pertained to warrant and derivative liabilities classified on the balance sheet within current liabilities. Management has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations and concluded that, without additional funding, the Company will not have sufficient funds to meet its obligations within one year from the date the condensed consolidated financial statements were issued. While management will look to continue funding operations by raising additional capital from sources such as sales of the Company’s debt or equity securities or loans in order to meet operating cash requirements, there is no assurance that management’s plans will be successful.

The Company obtained convertible debt financing for up to $60,000,000 in gross proceeds on January 11, 2018, of which the Company had received $25,000,000 in gross proceeds as of June 30, 2018, which the Company used (i) to increase the Company’s ownership interests or other rights and interests in MoviePass; (ii) to satisfy certain indebtedness; and (iii) for general corporate purposes and transaction expenses. The Company may also use the proceeds to make other acquisitions. Additionally, during May and June of 2018, the Company received $25,077,889 in gross proceeds related to the convertible debt financing obtained on November 7, 2017.

On June 26, 2018, the Company obtained preferred stock and convertible debt financing for up to $139,400,000 in gross proceeds, of which the Company had received $20,500,000 in gross proceeds as of June 30, 2018, which the Company used for general corporate purposes and transaction expenses. The Company may also use the proceeds to make other acquisitions.  

As of June 30, 2018 the Company had $0 and $352,188 of make-whole principal balance outstanding under the Senior Convertible Notes issued to institutional investors on November 7, 2017 and January 23, 2018, respectively, and there remained $228,672,111 in restricted principal for which a corresponding amount of principal under the investor notes remains to be paid to the Company by the holders of those convertible notes.

In order to facilitate the Company’s further access to capital, in January 2018 the Company filed a shelf registration statement on form S-3 that was declared effective by the SEC on February 9, 2018, which allows the Company to offer and sell up to $400,000,000 of its equity or equity-linked securities. Using the shelf registration statement, the Company completed an underwritten public offering of common stock and warrants for gross proceeds of approximately $105.0 million on February 13, 2018. The total net proceeds to the Company from the February 2018 public offering were $96.9 million. The Company also completed an underwritten public offering of common stock and warrants for gross proceeds of approximately $30.3 million on April 23, 2018. The total net proceeds to the Company from the April 2018 public offering were approximately $27.5 million.

On April 18, 2018, the Company entered into an Equity Distribution Agreement (the “Sales Agreement”) with Canaccord Genuity LLC (“Canaccord”) under which the Company may offer and sell under the shelf registration statement up to $150 million of its common stock at prevailing market prices in a continuous at-the market offering (the “ATM Offering”) through its sales agent Canaccord. The Company may use the net proceeds from the ATM Offering to increase the Company’s ownership stake in MoviePass and to support the operations of MoviePass and MoviePass Ventures, to satisfy a portion or all of any amounts due and payable in connection with the convertible notes issued on November 7, 2017, January 23, 2018 and June 26, 2018, and for general corporate purposes and transaction expenses. The proceeds may also be used for acquisitions. As of June 30, 2018, the Company has sold 0.4 million shares (100.8 million pre-split), and received net proceeds of $52.7 million, pursuant to the ATM Offering.

Without raising additional capital, there is substantial doubt about the Company’s ability to continue as a going concern through August 14, 2019. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business. A successful transition to attaining profitable operations is dependent upon achieving a level of positive cash flows adequate to support the Company’s cost structure. 

Notice of Potential Delisting from NASDAQ 

On June 21, 2018, the Company received a deficiency letter from the Nasdaq Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, for the prior 30 consecutive business days, the closing bid price for the Company’s common stock has closed below a minimum $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (“Rule 5550(a)(2)”). The Nasdaq deficiency letter has no immediate effect on the listing of the Company’s common stock, and its common stock will continue to trade on the Nasdaq under the symbol “HMNY” at this time.

In accordance with Nasdaq Listing Rule 5810(b), the Company has been given 180 calendar days, or until December 18, 2018 to regain compliance with Rule 5550(a)(2). The Company intends to monitor the closing bid price of its common stock and consider its available options to resolve its noncompliance with Rule 5550(a)(2).

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Acquisition of Controlling Interest in MoviePass Inc.

On December 11, 2017, the Company completed its acquisition of a 62.41% majority interest in MoviePass (such acquisition, the “MoviePass Transaction”), for the following consideration: (1) a subordinated convertible promissory note in the principal amount of $12,000,000 (the “Helios Convertible Note”), which is convertible into shares of HMNY’s common stock, as further described below; (2) a $5,000,000 promissory note issued to MoviePass (the “Helios Note”); (3) the exchange of a convertible promissory note issued by MoviePass to HMNY in an aggregate principal amount of $11,500,000 (plus accrued interest thereon); (4) $1,000,000 in cash to purchase outstanding convertible notes of MoviePass, which were converted into shares of MoviePass’ common stock amounting to an additional 2% of the outstanding shares of MoviePass common stock; and (5) $20,000,000 in cash pursuant to the Investment Option Agreement, dated October 11, 2017, between the Company and MoviePass.

The Helios Convertible Note will convert into 16,000 (4,000,000 pre-split) unregistered shares of the Company’s common stock (the “Conversion Shares”) automatically upon the Company’s receipt of approval of its stockholders relating to the issuance of the Conversion Shares as required by and in accordance with Nasdaq Listing Rule 5635. Of that amount, 2,667 (666,667 pre-split) of the Conversion Shares are subject to forfeiture by MoviePass, in the Company’s sole discretion, as MoviePass failed to list its common stock on the Nasdaq Stock Market by March 31, 2018 (as required by the securities purchase agreement between the Company and MoviePass). As of the date of this report, the Company has not made a decision with respect to the disposition of those shares that are subject to forfeiture.  

The Company has valued the Helios Convertible Note as of the acquisition date, including the valuation of the shares subject to forfeiture as noted above, at the fair value on the acquisition date based on a Monte Carlo simulation. The shares subject to forfeiture are contingent consideration and have been valued as a separate component of the Helios Convertible Note. As of the acquisition date the Helios Convertible Note was valued at $29,000,000 and the portion of the Conversion Shares subject to forfeiture was valued at $5,152,446. All of the purchase consideration, with the exception of the $1,000,000 paid for the MoviePass convertible notes which were converted into MoviePass common stock, was retained by MoviePass. Accordingly, the value of the Helios Convertible Note, the Helios Note and the value associated with the Conversion Shares subject to forfeiture are eliminated in consolidation for financial reporting purposes.

Goodwill recognized as part of the MoviePass Transaction is not expected to be tax deductible.

The Company has determined preliminary fair values of the assets acquired and liabilities assumed in the MoviePass Transaction. These values are subject to change as management performs additional reviews of the assumptions utilized.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Company has made a provisional allocation of the purchase price of the MoviePass Transaction to the assets acquired and the liabilities assumed as of the acquisition date. The following table summarizes the provisional purchase price allocations relating to the MoviePass Transaction.

The Company has not completed the valuation studies necessary to finalize the acquisition fair values of the assets acquired and liabilities assumed and related allocation of the purchase price for the MoviePass Transaction. Accordingly, the type and value of the intangible assets and deferred revenue amounts set forth above are preliminary. Once the valuation process is finalized for the MoviePass Transaction, there could be changes to the reported values of the assets acquired and liabilities assumed, including goodwill, intangible assets and deferred revenue and those changes could differ materially from what is presented above.

The Company determined the provisional fair value of the acquired intangible assets through a combination of the market approach and the income approach. The significant assumptions used in certain valuations associated with the MoviePass Transaction include discount rates ranging from 10.0% to 51.0%. In determining the value of tradenames and trademarks the Company observed royalty rates ranging from 0.0% to 100.0%, and utilized a 1.0% rate for MoviePass’s aggregated tradenames and trademarks. Additionally, the Company observed royalty rates related to MoviePass’s technology assets acquired ranging from 0.0% to 50.0%, and used a 1.0% royalty rate in determining the fair value of the acquired technology. In accordance with Emerging Issues Task Force (“EITF”) guidance, the fair value of an acquired liability related to deferred revenue would include the direct and incremental cost of fulfilling the obligation plus a normal profit margin. The Company utilized historical operating results in estimating the direct and incremental costs of fulfilling the acquired deferred revenue obligations. The non-controlling interest in MoviePass was determined based on the fair value of MoviePass less the amounts paid by the Company for its 62.41% controlling interest.

The estimated useful lives of acquired intangible assets are 7 years for customer relationships, 3 years for technology, and 7 years for tradenames and trademarks. Acquired deferred revenue is estimated to be realized based on the length of the subscription, over 12 months from the acquisition date.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Additional MoviePass Subscription Agreements

On March 8, 2018, the Company entered into a Subscription Agreement with MoviePass (the “March 2018 Agreement”), pursuant to which, in lieu of repayment of advances totaling $55,525,000 made by the Company, MoviePass agreed to sell to the Company an amount of MoviePass common stock equal to 18.79% of the total then outstanding shares of MoviePass common stock (excluding shares underlying MoviePass options and warrants) (the “March 2018 MoviePass Purchased Shares”). MoviePass also agreed to issue to the Company, in addition to the March 2018 MoviePass Purchased Shares, without payment of additional consideration by the Company, for purposes of anti-dilution, an amount of shares of MoviePass common stock that caused the Company’s total ownership of the outstanding shares of MoviePass common stock (excluding shares underlying MoviePass options and warrants), together with the March 2018 MoviePass Purchased Shares, to equal 81.2% as of March 8, 2018.

From February 27, 2018 through April 12, 2018, the Company advanced a total of $35,000,000 to MoviePass (the “Second Advance”). On April 16, 2018, the Company entered into an additional Subscription Agreement with MoviePass (the “April 2018 Agreement”), pursuant to which, in lieu of repayment of the Second Advance, MoviePass agreed to sell to the Company an amount of shares of common stock of MoviePass equal to 10.6% of the total then outstanding MoviePass common stock (excluding shares underlying MoviePass options and warrants) (the “April 2018 MoviePass Purchased Shares”), based on a pre-money valuation of MoviePass of $295,525,000 as of March 31, 2018. Pursuant to the April 2018 Agreement, MoviePass also agreed to issue to the Company, in addition to the April 2018 MoviePass Purchased Shares, without payment of additional consideration by the Company, for purposes of anti-dilution, an amount of shares of common stock of MoviePass that caused the Company’s total ownership of the outstanding shares of common stock of MoviePass (excluding shares underlying MoviePass options and warrants), together with the April 2018 MoviePass Purchased Shares, to equal 91.8% as of April 12, 2018.

In addition, from April 16, 2018 through June 30, 2018 the Company has advanced MoviePass, $112,731,000 for operational funding. Such amount remains payable to the Company by MoviePass and has been eliminated in consolidation for financial reporting purposes.

The Company has accounted for the March 2018 MoviePass Purchased Shares and the April 2018 MoviePass Purchased Shares as an acquisition of a portion of the non-controlling interest in MoviePass. Accordingly, the non-controlling interest at March 8, 2018 and April 12, 2018 was reduced respectively, based on the percentage acquired, and the balance invested in excess of the value of the non-controlling interest acquired was recorded as additional invested capital.

Acquisition of Moviefone Brand

On April 4, 2018, the Company entered into an Asset Purchase Agreement (the “Moviefone Purchase Agreement”) with Oath Inc. (formerly, AOL Inc.), a Delaware corporation and subsidiary of Verizon Communications and certain of its subsidiaries (“Oath”), pursuant to which the Company completed the acquisition from Oath of certain products, rights, technology, contracts, data and other assets related to the Moviefone brand (the “Moviefone Assets”). The acquisition of Moviefone has been accounted for as the acquisition of a business. The historical operational results of Moviefone were not significant for purposes of providing pro forma financial information. The purchase price for the Moviefone Assets consisted of the following: (i) $1.0 million in cash, (ii) the issuance of 10,201 (2,550,154 pre-split) shares of common stock of the Company with a market value of $7.6 million as of the closing date, and (iii) the issuance of warrants to purchase 10,201 (2,550,154 pre-split) shares of common stock of the Company at an exercise price of $1,375 ($5.50 pre-split) per share. In addition, and pursuant to the Moviefone Purchase Agreement, the Company assumed certain specified liabilities incurred after the acquisition date and retained certain employees of Moviefone.

The Company determined the provisional fair value of the acquired intangible assets through a combination of the market approach, cost and the income approach. The significant assumptions used in certain valuations associated with the Moviefone transaction include discount rates ranging from 9.0% to 22.1%. In determining the value of tradenames and trademarks the Company observed royalty rates ranging from 0.0% to 100.0% and utilized a 10.0% rate for Moviefone’s aggregated tradenames and trademarks. Additionally, the Company utilized a cost approach for Moviefone’s technology assets acquired based on man hours to construct in determining the fair value of the acquired technology.  The non-compete agreements were analyzed and found to have a de minimis value.

The estimated useful lives of acquired intangible assets are 20 years for tradenames and trademarks, 7 years for customer relationships and 3 years for technology. 

The following table summarizes the consideration paid for Moviefone by the Company, and the amounts of assets acquired, and liabilities assumed and recognized at the acquisition date:

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

MoviePass Films

On May 23, 2018 the Company entered into the LOI with EFO, pursuant to which EFO acquired a 49% membership interest in MoviePass Films. Pursuant to the LOI, the Company capitalized MoviePass Films with an initial capital contribution of $2,000,000 in cash and retained a 51% interest in MoviePass Films. EFO has assigned its rights in a film output agreement of EFO to MoviePass Films. MoviePass Films has begun operations, and the Company and EFO are finalizing the long form agreements that will further define the relative rights and duties of the Company and EFO with respect to MoviePass Films. In accordance with the LOI as of June 30, 2018, the Company is committed to contribute to MoviePass Films an additional $3,000,000 in cash and 16,000 (4,000,000 pre-split) shares for the acquisition of ownership and economic interests in films.

The Company has not performed the valuation studies required to value film output agreement assigned to MoviePass Films by EFO.

The Company has a 51% membership interest in MoviePass Films and the right to designate three out of five of the members of its board of managers and accordingly has consolidated the results of MoviePass Films with those of the Company.

Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB ASC. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangements, stock options or warrants.

The following table shows the outstanding dilutive common shares excluded from the diluted net loss per share attributable to common stockholder’s calculation as they were anti-dilutive:

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Prepaid expenses and other current assets consisted of the following as of June 30, 2018 and December 31, 2017:

The following table sets forth the major categories of the Company’s intangible assets and the estimated useful lives as of June 30, 2018 and December 31, 2017 for those assets that are not already fully amortized: 

The Company recorded amortization expense of $1,357,467 and $426,651 for the three months ended June 30, 2018 and 2017, respectively, and $2,613,574 and $853,302 for the six months ended June 30, 2018 and 2017, respectively. 

The following table outlines estimated future annual amortization expense for the next five years and thereafter:

Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Goodwill and indefinite lived intangible assets are tested for impairment annually as of December 31 ^st and more often if a triggering event occurs, by comparing the fair value of each reporting unit to its carrying value.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

As of June 30, 2018 and December 31, 2017, accounts payable and accrued expenses consisted of the following:

February 2017 Notes

On February 8, 2017, the Company issued two Senior Secured Convertible Notes (the “February 2017 Notes”) to an institutional investor (the “Investor”) in the aggregate principal amount of $5,681,818 for consideration consisting of a secured promissory note payable by the Investor to the Company in the principal amount of $5,000,000 (the “February 2017 Investor Note”) which offsets the February 2017 notes of the same amount. Upon issuance, the initial principal balance of $681,818 of the February 2017 Notes was accounted for as an original issuance discount and accreted into interest expense over the life of the February 2017 Notes. As cash is received from the February 2017 Investor Note, and the related principal amount of the February 2017 Notes increases accordingly, a derivative liability related to the conversion feature embedded within the February 2017 Notes is recorded as a debt discount, and accreted into interest expense over the life of the February 2017 Notes using the effective interest method, and any excess value over the amount of cash received is expensed immediately to interest expense. In addition, February Placement Agent Warrants were also issued (See The Placement Agent  Notes and Warrants below ), recognized as liabilities pursuant to their terms and recorded as a debt discount, and accreted into interest expense over the life of the February 2017 Notes using the effective interest method, and any excess value over the amount of cash received is expensed immediately to interest expense. The February 2017 Notes had a maturity date of October 8, 2017.

As of December 31, 2017, the Investor had fully funded the February 2017 Investor Note and had subsequently converted the aggregate principal amount due under the February 2017 Notes and approximately $49,000 of interest into 7,411 (1,852,886 pre-split) shares of the Company’s common stock in full payment of the February 2017 Notes. On any principal balance owed by the Company to the Investor, a 6% interest obligation was due quarterly and calculated on a 360-day basis. For the three and six months ended June 30, 2017, the Company had interest expense of $81,023 and $131,213, respectively. In a letter agreement executed on August 27, 2017, in consideration for the prepayment in the amount of $2,500,000, on the February 2017 Investor Note, which the Investor subsequently made on August 28, 2017, the Investor and the Company agreed that the Investor would have the right, but not the obligation, until December 31, 2017, to effect an exchange (the “Share Exchange”) of 3,365 (841,250 pre-split) shares of the Company’s common stock (the “Exchange Shares”) for one or more senior secured convertible promissory notes in the form of the February Additional Note (the “New Note”), with the right to substitute the alternate conversion price of the New Note with the alternate conversion price of the Company’s Series B Senior Secured Convertible Note (the “Series B Note”) that was issued on August 16, 2017. Any New Note issued was in a principal amount equal to the product of the prepayment amount ($2,500,000) multiplied by a fraction, the numerator of which was the number of the aggregate shares being tendered to the Company in the Share Exchange and the denominator of which was 3,365 (841,250 pre-spilt). The maturity date of any New Note was 45 days following the issuance of the New Note, and the conversion price of the New Notes was $1,125 ($4.50 pre-split), or, at the election of the Investor, the Investor could convert at the Alternate Conversion Price. The Alternate Conversion Price was defined as either (A) the lower of (i) $1,125 ($4.50 pre-split) and (ii) the greater of (I) $1,000 ($4.00 pre-split) and (II) 85% of the quotient of (x) the sum of the volume weighted average price of the common stock for each of the 5 consecutive trading days ending on the trading day immediately preceding the delivery of the Conversion Notice, divided by (y) 5 or (B) that price which shall be the lowest of (i) $750 ($3.00 pre-split) and (ii) the greater of (I) the Floor Price then in effect and (II) 85% of the quotient of (x) the sum of the volume weighted average price of the Company’s common stock for each of the 5 consecutive trading days ending and including the date of the alternate conversion, divided by (y) 5. The Floor Price was defined as $750 ($3.00 pre-split) through October 4, 2017 and $125 ($0.50 pre-split) following October 4, 2017. On October 23, 2017, the Company and the Investor entered into a Third Amendment and Exchange Agreement (the “Third Exchange Agreement”) for the purpose of exchanging the New Note for 3,789 (947,218 pre-split) shares of common stock (the “New Exchange Shares”) and rights (the “Rights”) to receive 2,211 (552,782 pre-split) additional shares of common stock. As partial consideration for the New Exchange Shares and the Rights, the Investor agreed, among other things, to terminate the Investor’s right to exchange the remaining Exchange Shares for New Notes. The termination of these rights is accounted for as financing fees associated with the February 2017 Notes, valued at $19,950,000 based on the trading price of the Company’s stock on the date of the Third Exchange Agreement and recorded as interest expense. 

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

August 2017 Notes

On August 16, 2017, the Company issued to the Investor three Senior Secured Convertible Notes (the “August 2017 Notes”) in the aggregate principal amount of $10,300,000 and a 5-year warrant for the purchase of 7,572 (1,892,972 pre-split) shares of the Company’s common stock at an exercise price of $812.50 ($3.25 pre-split) per share (the “Investor Warrant”) for consideration consisting of a secured promissory note payable by the Investor to the Company (the “August 2017 Investor Note”) in the principal amount of $8,800,000 and $220,000 which offsets the August 2017 Notes of the same amount. The August 2017 Notes had a maturity date of April 16, 2018 and the Investor Warrant had an expiration date of April 16, 2022. The $220,000 secured promissory note payable by the Investor was issued in exchange for a $250,000 Senior Secured Convertible Note; therefore, a discount of $30,000 was recognized upon issuance and accreted into interest expense over the life of the note using the effective interest method. Upon issuance, the Investor Warrant, which was determined to be a liability, was recorded at fair value and accounted for as an original issuance discount to the August 2017 Notes. The excess in value of the Investor Warrant over the August 2017 Notes upon issuance was recorded as interest expense, while the initial principal balance was recorded as a debt discount and accreted into interest expense over the life of the August 2017 Notes.

At December 31, 2017, the contracted conversion prices for the August 2017 Notes, which included an Initial Series A Note, an Additional Series A Note and the Series B Note, were $1,000 ($4.00 pre-split) for the Initial Series A Note and the Additional Series A Note and $750 ($3.00 pre-split) for the Series B Note. As of December 31, 2017, the Investor had fully prepaid the August 2017 Investor Note and converted $5,794,560 in principal amount, plus accrued interest, of the August 2017 Notes into 5,931 (1,482,639 pre-split) shares of the Company’s common stock. On any principal balance owed by the Company to the Investor, a 6% interest obligation was due quarterly and calculated on a 360-day basis. For the three and six months ended June 30, 2018, the Company had $37,126 of interest expense pertaining to the unpaid principal amount of the August 2017 Notes. The full outstanding principal balance of $4,677,899 and accrued interest of $37,126 were converted to 4,678 (1,169,475 pre-split) shares of the Company’s common stock on February 20, 2018. As of June 30, 2018, the unpaid principal amount of the August 2017 Notes owed to the Investor was $0.

The Investor Warrant included anti-dilution provisions. The anti-dilution provisions were triggered when the Company issued a new senior convertible note to the Investor in the aggregate principal amount of $697,000 (the “Exchange Note”) in September 2017. Because the Exchange Note had a conversion price of $750 ($3.00 pre-split) per share, which was lower than the Investor Warrant per share exercise price of $812.50 ($3.25 pre-split), the number of shares of the Company’s common stock issuable to the Investor pursuant to the Investor Warrant was increased from 7,572 (1,892,972 pre-split) to 8,203 (2,050,720 pre-split) and the per share exercise price of the Investor Warrant was decreased from $812.50 ($3.25 pre-split) to $750 ($3.00 pre-split). As of December 31, 2017, the Investor had elected, in a cashless transaction, to exercise the Investor Warrant to purchase 6,860 (1,715,006 pre-split) shares of common stock and also paid the Company the sum of $977,142 to exercise the Investor Warrant for an additional 1,303 (325,714 pre-split) shares of common stock. On November 21, 2017 in conjunction with the Fourth Amendment and Exchange Agreement entered into between the Investor and the Company, the remaining 40 (10,000 pre-split) shares of common stock subject to the Investor Warrant were exchanged for a new warrant (the “Exchange Warrant”). The Exchange Warrant, which was determined to be a liability and was recorded at fair value, was in substantially the form of the Investor Warrant, except that: 

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

In March 2018, the Investor exercised the Exchange Warrant by means of a cashless exercise into 17,414 (4,353,581 pre-split) shares of common stock and a cash payment from the Company of $779,219, resulting in a reduction of the warrant liability and corresponding adjustment to Additional Paid in Capital.

With the issuance of the Exchange Warrant, the resulting cash flows of the remaining Investor Warrant were considered to be significantly modified within the context of ASC 470. Accordingly, the incremental change in fair value between the Investor Warrant and the Exchange Warrant was calculated as $12,878,864 and recorded as interest expense. 

November 2017 Notes

On November 7, 2017, the Company issued two Senior Secured Convertible Notes in the aggregate principal amount of $100,000,000 (collectively, the “November 2017 Notes”) to institutional investors. The November 2017 Notes consist of a Senior Secured Convertible Note in the amount of $5,000,000 (the “November Initial Note”) and a Senior Secured Convertible Note in the amount of $95,000,000 (the “November Additional Note”) in exchange for an upfront cash payment of $5,000,000 and a senior secured promissory note of $95,000,000 (the “November 2017 Investor Note”). As of December 31, 2017, purchasers of the November 2017 Notes prepaid $15,650,000 of the November 2017 Investor Note with the remaining principal being subject to master netting agreements between the Company and such holders. In conjunction with the prepayment, the Company was also obligated to pay the holders interest which would have accrued with respect to the outstanding balance for the period from the redemption date through the maturity date (the “Make-Whole Interest”). As cash is received from the November 2017 Investor Note, and the related principal amount of the November 2017 Notes increases accordingly, a derivative liability related to the conversion feature and Make-Whole Interest feature embedded within the November 2017 Notes is recorded as a debt discount , and accreted into interest expense over the life of the November 2017 Notes using the effective interest method, and any excess value over the amount of cash received is expensed immediately to interest expense. In addition, November Placement Agent Warrants are also issued (See The Placement Agent Notes Warrants below), recognized as liabilities pursuant to their terms and recorded as a debt discount, and accreted into interest expense over the life of the November 2017 Notes using the effective interest method, and any excess value over the amount of cash received is expensed immediately to interest expense.

The Company elected to defer payment of the Make-Whole Interest by capitalizing the full balance under the same terms as the original November 2017 Notes. On January 2, 2018, an additional $646,263 of interest was capitalized and added to the principal balance of the November 2017 Notes and on January 26, 2018, investors redeemed principal of $2,894,062 in exchange for cash. On April 2, 2018, an additional $1,028,730 of interest was capitalized and added to the principal balance of the note. As of June 30, 2018, the entire capitalized balance was converted to shares of the Company’s common stock and the outstanding balance owed on the capitalized Make-Whole Interest was $0.

The November 2017 Notes have a maturity date of November 7, 2019. On any unfunded principal balance of the November 2017 Investor Notes the Company owed to the investors a 5.25% interest obligation which is due quarterly and calculated on a 360-day basis. For the funded portion of the November 2017 Notes the Company has a 10% interest obligation. The initial conversion price for the November 2017 Notes, which includes both the November Initial Note and November Additional Note, was $3,015 ($12.06 pre-split). However, the conversion price may be adjusted upon obtaining stockholder approval in accordance with Nasdaq Listing Rule 5635(d) of the issuance of our common stock at any conversion price below $3,015, which may result from full ratchet conversion price adjustments required by the November 2017 Notes in the event of certain issuances below the initial conversion price. As a result, during the second quarter of 2018, in conjunction with the April 2018 Offering and the sale of shares in the ATM Offering at prices lower than the initial conversion price, the conversion price for the November 2017 Notes has been reduced, and as of June 30, 2018 and August 13, 2018, the conversion price was $0.345 and $0.05, respectively.

During the second quarter of 2018, the Company received cash payments on the November 2017 Notes of $25,077,889, of which $24,202,889 of principal and $3,704,867 of accrued interest, were converted into 235,622 (58,905,544 pre-split) shares of the Company’s common stock during the six months ended June 30, 2018. As of June 30, 2018, the outstanding principal amount of the November 2017 Notes was $875,000. For the three and six months ended June 30, 2018, the Company recognized $4,677,484 and $5,733,114 of interest expense pertaining to the November 2017 Notes and had $698,662 of accrued interest as of June 30, 2018.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

On June 1, 2018, the Company entered into an amendment to the securities purchase agreement between the Company and the institutional investors holding the November 2017 Notes to reduce the number of shares of common stock required to be reserved for issuance under the November 2017 Notes from 200% to 110% of the maximum number of shares of common stock issuable upon conversion of the November 2017 Notes until the earlier of the  January 2018 Notes Stockholder Approval Date (as defined below) and August 1, 2018. After such date, the required reserve amount will be increased back to 200%.

January 2018 Notes

On January 23, 2018, pursuant to a securities purchase agreement (the “January Securities Purchase Agreement”) entered into by the Company and an institutional investor the Company sold and issued senior convertible notes in the aggregate principal amount of $60,000,000 (collectively, the “January 2018 Notes”), consisting of (i) a Series A-1 Senior Bridge Subordinated Convertible Note in the aggregate principal amount of $25,000,000 (the “Series A-1 Note”) and (ii) a Series B-1 Senior Secured Bridge Convertible Note in the aggregate principal amount of $35,000,000 (the “Series B-1 Note”) for consideration consisting of (i) a cash payment in the aggregate amount of $25,000,000, and (ii) a secured promissory note payable by the buyer to the Company (the “January 2018 Investor Note”) in the aggregate principal amount of $35,000,000 which is subject to a master netting agreement between the Company and the buyer (collectively, the “January 2018 Financing”). In conjunction with the prepayment, of the January 2018 Investor Note the Company was also obligated to pay the buyer interest which would have accrued with respect to the outstanding balance for the period from the redemption date through the maturity date (the “January Make-Whole Interest”). As cash is received from the January 2018 Investor Note, and the related principal amount of the January 2018 Notes increases accordingly, a derivative liability related to the conversion feature and the January Make-Whole Interest feature embedded within the January 2018 Notes is recorded as a debt discount and any excess value over the amount of cash received is expensed immediately to interest expense. In addition, January Placement Agent Warrants were also issued (See The Placement Agent Notes and Warrants below), recognized as liabilities pursuant to their terms and recorded as a debt discount, and accreted into interest expense over the life of the January 2018 Notes using the effective interest method, and any excess value over the amount of cash received was expensed immediately to interest expense.

The Company elected to defer payment of the January Make-Whole Interest by capitalizing the full balance under the same terms as the original January 2018 Notes. On April 2, 2018, $352,187 of interest was capitalized and added to the principal balance of the note. As of June 30, 2018, the entire capitalized balance of $352,187 remained outstanding.

Unless earlier converted or redeemed, the January 2018 Notes have a maturity date of January 23, 2020. The Series A-1 Note bears interest at a rate of 10% per annum. Upon issuance, the Series B-1 Note initially consisted entirely of “Restricted Principal” which is defined as that portion of the principal amount of a Series B-1 Note that equals the outstanding principal amount of the corresponding January 2018 Investor Note. The principal amount of the January 2018 Investor Note is subject to reduction through prepayments by the buyer of the January 2018 Investor Note given by the buyer to the Company or, upon maturity or redemption of the Series B-1 Note, by netting the amount owed by the buyer under the January 2018 Investor Note against a corresponding amount of principal to be canceled under the buyer’s Series B-1 Note. Each prepayment under the January 2018 Investor Note will convert a corresponding amount of Restricted Principal under the Series B-1 Note into “Unrestricted Principal” that may be converted into common stock.

The January 2018 Notes have an initial conversion price of $2,860 ($11.44 pre-split) per share. However, pursuant to the January Securities Purchase Agreement, the Company was required to seek stockholder approval in accordance with Nasdaq Listing Rule 5635(d) of the issuance of our common stock at a conversion price per share as low as $1.83 following the occurrence of an event of default or otherwise at any conversion price below $2,860 which may result from full ratchet conversion price adjustments required by the January 2018 Notes in the event of certain issuances below the initial conversion price. Such stockholder approval was obtained on July 23, 2018. As a result, in conjunction with the April 2018 Offering and the sale of shares in the ATM Offering at prices lower than the initial conversion price, the conversion price for the January 2018 Notes has been reduced, and as of August 13, 2018, the conversion price was $0.05.

The Company is required to redeem the January 2018 Notes (i) at the option of the buyer from and after June 7, 2018; (ii) at the option of the buyer if the Company completes a subsequent public or private offering of debt or equity securities, including equity-linked securities (subject to certain excluded issuances); (iii) upon the occurrence of an Event of Default, including a Bankruptcy Event of Default (each, as defined in the January 2018 Notes); or (iv) in the event of a Change of Control (as defined in the January 2018 Notes). With the exception of a redemption required by an Event of Default (as defined in the January 2018 Notes), which may be paid with cash or shares of the Company’s common stock at the election of the buyer, the Company will be required to redeem the January 2018 Notes with cash. All amounts outstanding under the January 2018 Notes will be secured by the January 2018 Investor Note and all proceeds therefrom. The January 2018 Notes are not be secured by, and the buyer does not have a lien on, any assets of the Company other than the January 2018 Investor Note.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

MoviePass has guaranteed the obligations arising under the January 2018 Notes.

In accordance with the terms of the January Securities Purchase Agreement, as amended, the Company was obligated to convene a special meeting of its stockholders on or prior to July 23, 2018, for the purpose of approving the issuance of all securities that may be issued in connection with the January 2018 Financing, which stockholder approval was obtained on July 23, 2018.

Provided there has been no Equity Conditions Failure (as defined in the January 2018 Notes) and, as to the Series A-1 Note, no August 2017 Notes or November 2017 Notes remain outstanding, and as to the Series B-1 Note, no August 2017 Notes, November 2017 Notes, Series A-1 Note or Series B-1 Note with any Unrestricted Principal remain outstanding, the Company will have the right to redeem all, but not less than all, of the Outstanding Amount (as defined in the January 2018 Notes) remaining unpaid under the January 2018 Notes. The portion of the January 2018 Notes subject to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. Under the Series B-1 Note, the Company may reduce, on a dollar for dollar basis, the Restricted Principal by the surrender for cancellation of such portion of the corresponding January 2018 Investor Note equal to the amount of Restricted Principal included in the redemption.

During the second quarter of 2018, the Company did not receive any cash payments on the January 2018 Notes, therefore, the outstanding principal balance as of June 30, 2018 is $0. For the three and six months ended June 30, 2018, the Company recognized $457,775 and $809,963 of interest expense pertaining to the January 2018 Notes and had $457,775 of accrued interest as of June 30, 2018.

On June 1, 2018, the Company and the buyer entered into an amendment to the January Securities Purchase Agreement and the January 2018 Notes to reduce the number of shares of common stock required to be reserved for issuance under the January 2018 Notes from 200% to 100% of the maximum number of shares of common stock issuable upon conversion of the January 2018 Notes until the earlier of (1) the date stockholders approve resolutions providing for the issuance of the January 2018 Notes and the shares of common stock issuable upon conversion of the January 2018 Notes (the “January 2018 Notes Stockholder Approval” and the date the Stockholder Approval is obtained, the “January 2018 Notes Stockholder Approval Date”) and (2) August 1, 2018. After such date, the required reserve amount will be increased back to 200%. The amendment to the January Securities Purchase Agreement also extended the date by which the Company must hold the special meeting to obtain the January 2018 Notes Stockholder Approval from June 1, 2018 to August 1, 2018.

February 2018 Units Offering

On February 13, 2018, the Company sold an aggregate of approximately $105 million worth of units (the “Units”) of the Company’s securities to Canaccord Genuity Inc., on behalf of itself and as representative of the underwriters (the “Underwriters”), pursuant to which the Company issued and sold to the Underwriters in a best-efforts underwritten public offering (the “Offering”) at a purchase price of $5.192 per Unit with each Unit consisting of (A) 7,425,000 Series A-1 units (the “Series A-1 Units”), with each Series A-1 Unit consisting of (i) 0.004 (one pre-split) share of the Company’s common stock, and (ii) 0.004 (one pre-split) Series A-1 warrant to purchase 0.004 (one pre-split) share of the Company’s common stock (a “Series A-1 Warrant”); and (B) for those purchasers whose purchase of Series A-1 Units would result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 9.99% of the Company’s outstanding common stock following the consummation of the Offering, 11,675,000 Series B-1 units (the “Series B-1 Units”), consisting of (i) 0.004 (one pre-split) pre-funded Series B-1 warrant to purchase 0.0004 (one pre-split) share of common stock (a “Series B-1 Warrant”; and the Series B-1 Warrants, together with the Series A-1 Warrants, the “Warrants”) and (ii) 0.004 (one pre-split) Series A-1 Warrant.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Each Warrant is exercisable at any time on or after the issuance date until the five-year anniversary of the issuance date. Each Series A-1 Warrant is exercisable at a price of $1,625 ($6.50 pre-split) per share of common stock. Each Series B-1 Warrant has an aggregate exercise price of $1,375 ($5.50 pre-split) per share of common stock, all of which were pre-funded except for a nominal exercise price of $0.001 per share of common stock. All Series B-1 Warrants were exercised.

The Company received approximately $96.9 million in net proceeds from the sale of the Units, after deducting underwriting discounts and commissions equal to $5.9 million and estimated offering expenses of approximately $0.5 million, not taking into account any exercise of the Warrants. In addition, Palladium Capital Advisors, LLC acted as financial advisor in connection with the Offering and received a financial advisory fee equal to $1.9 million.

The Warrants were recorded as liabilities and initially recorded at fair value with the residual amount received allocated to the Company’s common stock. The exercise price of and number of shares of the Company’s common stock underlying the Warrants are subject to adjustment upon the issuance by the Company of stock dividends, stock splits, and similar proportionately applied changes affecting the Company’s outstanding common stock. In addition, the Series A-1 Warrants are subject to adjustment of the applicable exercise price then in effect, if, as of December 17, 2018 (the “Adjustment Date”), the quotient determined by dividing the (x) sum of the VWAP (as defined in the Series A-1 Warrant) of the common stock for each trading day during the 10 consecutive trading day period ending and including the trading day immediately preceding the Adjustment Date, divided by (y) 0.4 (10 pre-split) (all such determinations to be appropriately adjusted for any stock dividend, stock split, stock combination or other similar transaction during such period) (the “Adjustment Price”), is less than the applicable exercise price. If the Adjustment Price is less than the applicable exercise price as of the Adjustment Date, then the exercise price shall be automatically adjusted to be equal to the Adjustment Price.

If the Company consummates any merger, consolidation, sale or other reorganization event in which its common stock is converted into or exchanged for securities, cash or other property (“Fundamental Transaction”), then the Company shall pay at the Warrants holder’s option, exercisable at any time commencing on the occurrence or the consummation of a Fundamental Transaction and continuing for 90 days, an amount of cash equal to the value of the remaining unexercised portion of the warrant as determined in accordance with the Black-Scholes option pricing model on the date of such Fundamental Transaction.

April 2018 Units Offering

On April 23, 2018, the Company sold an aggregate of approximately $30 million worth of units (the “April 2018 Units”) of the Company’s securities to Canaccord Genuity Inc., on behalf of itself and as representative of the underwriters (the “April Offering Underwriters”), pursuant to which the Company issued and sold to the April Offering Underwriters in a best-efforts underwritten public offering (the “April 2018 Offering”) at a purchase price of $2.59875 per April 2018 Unit with each April 2018 Unit consisting of (A) 10,500,000 Series A-2 units (the “Series A-2 Units”), with each Series A-2 Unit consisting of (i) 0.004 (one pre-split) share (an “April Share”) of the Company’s common stock, and (ii) 0.004 (one pre-split) Series A-2 warrant to purchase 0.004 (one pre-split) share of common stock (the “Series A-2 Warrants”); and (B) for those purchasers whose purchase of Series A-2 Units would result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 9.99% of the Company’s outstanding common stock following the consummation of the April 2018 Offering, 500,000 Series B-2 units (the “Series B-2 Units”, consisting of (i) 0.004 (one pre-split) pre-funded Series B-2 warrant to purchase 0.004 (one pre-split) share of common stock (the “Series B-2 Warrants”, and together with the Series A-2 Warrants, the “April Warrants”) and (ii) 0.004 (one pre-split) Series A-2 Warrant. The April Shares, Series A-2 Warrants and Series B-2 Warrants were immediately separable.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Each April Warrant is exercisable at any time on or after the issuance date until the five-year anniversary of the issuance date. Each Series A-2 Warrant is exercisable at a price of $750 ($3.00 pre-split) per share of common stock. Each Series B-2 Warrant had an aggregate exercise price of $687.5 ($2.75 pre-split) per share of common stock, all of which were pre-funded except for a nominal exercise price of $0.001 per share of common stock. All of the Series B-2 Warrants were exercised.

The Company received approximately $27.5 million in net proceeds from the sale of the April 2018 Units, after deducting underwriting discounts and commissions equal to $1.7 million and estimated offering expenses of approximately $1.0 million, not taking into account any exercise of the April Warrants. In addition, Palladium Capital Advisors, LLC acted as financial advisor in connection with the April 2018 Offering and received a financial advisory fee equal to $0.6 million

The April Warrants were recorded as liabilities and initially recorded at fair value with the residual amount received allocated to the Company’s common stock. The exercise price of and number of shares of common stock underlying the April Warrants are subject to adjustment upon the issuance by the Company of stock dividends, stock splits, and similar proportionately applied changes affecting the Company’s outstanding common stock. The Series A-2 Warrants also include “full ratchet” anti-dilution protection provisions (the “Full Ratchet Adjustment”), which provide that if the Company issues any shares of common stock at a price less than the then current exercise price of the Series A-2 Warrants, or if the Company issues any securities convertible into, or exercisable, or exchangeable for, shares of common stock with an exercise or conversion price less than the then current exercise price of the Series A-2 Warrants, then the exercise price of the Series A-2 Warrants will automatically be reduced to the issuance price of the new shares of common stock or the exercise or conversion price of the April Warrants, options or other convertible or exchangeable securities.

The Full Ratchet Adjustment does not apply if the Company issues “Excluded Securities”, including certain (i) option and other equity incentive awards approved by the Company’s board of directors to be issued to directors, officers, consultants and employees, (ii) shares of common stock issuable pursuant to existing employment agreements, (iii) shares of common stock issued upon conversion or exercise of convertible securities that were previously issued, (iv) shares of common stock issued pursuant to strategic license agreements, mergers or acquisitions (but does not include a transaction in which the Company is issuing securities primarily for the purpose of raising capital), (v) shares of common stock issued under the ATM Offering after the fifteenth calendar day that the Series A-2 Warrants were issued and (vi) 2,000 ( 500,000 pre-split) shares granted by the Company’s board of directors to Helios & Matheson Information Technology Ltd, a current stockholder of the Company, in exchange for its entry into a 12-month lock-up agreement with the Company.

If the Company consummates any merger, consolidation, sale or other reorganization event in which its common stock is converted into or exchanged for securities, cash or other property (“fundamental transaction”), then the Company shall pay at the holder’s option, exercisable at any time commencing on the occurrence or the consummation of a fundamental transaction and continuing for 90 days, an amount of cash equal to the value of the remaining unexercised portion of the warrant as determined in accordance with the Black-Scholes option pricing model on the date of such fundamental transaction.

June 2018 Convertible Notes and Series A Preferred Stock

On June 26, 2018, pursuant to the Securities Purchase Agreement, dated as of June 21, 2018, by and between the Company and certain institutional investors (the “June Buyers” and such agreement, the “June Securities Purchase Agreement”), the Company issued and sold 20,500 shares of Series A Preferred Stock of the Company (the “Preferred Stock”) and Series B-2 Senior Convertible Notes in the aggregate principal amount of $164,000,000 (which includes an approximate 15.0% original issue discount) (the “June 2018 Convertible Notes”), for total consideration consisting of an aggregate cash payment to the Company of $20,500,000 and secured promissory notes payable by the June Buyers to the Company (the “June 2018 Investor Notes”) in the aggregate principal amount of $139,400,000, which is subject to a master netting agreement between the Company and the June Buyers (collectively, the “June 2018 Financing”).

Unless earlier converted or redeemed, the June 2018 Convertible Notes will mature on June 26, 2020. The maturity date of the June 2018 Investor Notes is June 26, 2060. Upon issuance, (i) $24,600,000 in principal amount of the June 2018 Convertible Notes consisted of “Unrestricted Principal”, which is defined as that portion of the principal amount of June 2018 Convertible Note that may be converted at any time and is not subject to netting against any June 2018 Investor Notes, and (ii) the balance of the principal amount under the June 2018 Convertible Notes, equal to $139,400,000, consisted entirely of “Restricted Principal”, which is defined as that portion of the principal amount of a June 2018 Convertible Note that equals the outstanding principal amount of a corresponding June 2018 Investor Note. The principal amount of each June 2018 Investor Note is subject to reduction through prepayments by the applicable June Buyer of the applicable June 2018 Investor Note given by the applicable June Buyer to the Company or, upon maturity or redemption of the June 2018 Convertible Notes, by netting the amount owed by the applicable June Buyer under such June 2018 Investor Note against a corresponding amount of Restricted Principal to be canceled under the June 2018 Convertible Note. Each prepayment under the June 2018 Investor Notes will convert a corresponding amount of Restricted Principal under the June 2018 Convertible Notes into “Unrestricted Principal” that may be converted into common stock.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

As of June 30, 2018, the June Buyers had converted $0 of the June 2018 Notes into shares of the Company’s common stock. On any unfunded principal balance of the June 2018 Investor Notes the Company owed to the June Buyers a 5.25% interest obligation which is due quarterly and calculated on a 360-day basis. For the funded portion of the June 2018 Notes the Company has a 10% interest obligation.

Interest on the June 2018 Convertible Notes will be capitalized on each quarterly interest payment date starting July 1, 2018 by adding the interest to the then outstanding principal amount of the June 2018 Convertible Notes. Interest may also be paid by inclusion in the “Outstanding Amount”, which is defined in the June 2018 Convertible Notes as the principal amount to be converted or redeemed, accrued and unpaid interest with respect to such principal amount, accrued and unpaid late charges, if any, and the “June Make-Whole Amount.” The “June Make-Whole Amount” is defined as the amount of any interest that, but for a conversion or redemption, would have accrued with respect to the Outstanding Amount (as defined in the June 2018 Convertible Notes) of principal being redeemed or converted under the June 2018 Convertible Notes, for the period from the applicable date of conversion or redemption date through the maturity date of the June 2018 Convertible Notes. No June Make-Whole Amount will be payable under the June 2018 Convertible Notes with respect to any portion of Restricted Principal after the cancellation of such Restricted Principal pursuant to netting under the June 2018 Convertible Notes, the June 2018 Investor Notes or the Master Netting Agreement (as defined below), as applicable. In the event of an event of default interest under the June 2018 Convertible Notes may be increased to 15% during the first 30 days following the occurrence and continuance of an event of default and to 18% thereafter (the “Default Rate”).

The June Buyers may elect, at any time after the Company obtains approval by its stockholders to either increase its authorized shares of common stock or effect a reverse stock split, which approval was obtained on July 23, 2018, to convert the June 2018 Convertible Notes into shares of the Company’s common stock at the Conversion Price, subject to certain beneficial ownership limitations described below. The “Conversion Price” is $250 ($1.00 pre-split) per share (subject to anti-dilution adjustment as described in the June 2018 Convertible Notes).

Provided there has been no Equity Conditions Failure (as defined in the June 2018 Convertible Notes) and no November 2017 Notes, January 2018 Notes, or shares of the Preferred Stock remain outstanding and no Unrestricted Principal remains outstanding under the June 2018 Convertible Notes, the Company will have the right to redeem all, but not less than all, of the Outstanding Amount remaining unpaid under the June 2018 Convertible Notes. The portion of the June 2018 Convertible Notes subject to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. Under the June 2018 Convertible Notes, the Company may reduce, on a dollar for dollar basis, the Restricted Principal by the surrender for cancellation of such portion of the corresponding June 2018 Investor Notes equal to the amount of Restricted Principal included in the redemption.

The June Buyers may elect, at any time after the Company obtains approval by its stockholders to either increase its authorized shares of common stock or effect a reverse stock split, which approval was obtained on July 23, 2018, to convert the June 2018 Convertible Notes into shares of the Company’s common stock at the Conversion Price, subject to certain beneficial ownership limitations described below. The “Conversion Price” is $250 ($1.00 pre-split) per share (subject to anti-dilution adjustment as described in the June 2018 Convertible Notes). However, pursuant to the June Securities Purchase Agreement, the Company is required to seek stockholder approval in accordance with Nasdaq Listing Rule 5635(d) of the issuance of common stock at a conversion price per share below $250 which may result from the full ratchet conversion price adjustments required by the June 2018 Convertible Notes in the event of certain issuances below the initial conversion price. The Company is required to hold a special meeting of stockholders by October 18, 2018 to obtain such approval. If such stockholder approval is obtained, if the Company issues securities in certain transactions, such as the ATM Offering, at a price lower than the applicable conversion price, then the applicable conversion price for the June 2018 Convertible Notes will be reduced to equal such lower price. As of August 13, 2018, the conversion price would be $0.05 if stockholder approval is obtained.

The Preferred Stock was determined to be classified in equity. Accordingly, the June 2018 Convertible Notes and the Preferred Stock were recorded based on their relative fair values. A derivative liability related to the conversion feature and make-whole interest feature embedded within the June 2018 Convertible Notes is recorded as a debt discount, and accreted into interest expense over the life of the June 2018 Convertible Notes using the effective interest method, and any excess value over the amount allocated to the June 2018 Convertible Notes was expensed immediately to interest expense. In addition, June Placement Agent Warrants are also issued (See The Placement Agent Notes and Warrants below), recognized as liabilities pursuant to their terms and recorded as a debt discount, and accreted into interest expense over the life of the June 2018 Convertible Notes using the effective interest method, and any excess value over the amount of cash received is expensed immediately to interest expense.

MoviePass has guaranteed the obligations arising under the June 2018 Convertible Notes.

In connection with the June 2018 Financing, Theodore Farnsworth, the Chief Executive Officer and Chairman of the Board of the Company, and Helios & Matheson Information Technology Ltd, of which Muralikrishna Gadiyaram, a director of the Company, is the chief executive officer, and its wholly-owned subsidiary, Helios & Matheson Inc., who collectively owned approximately 1.5% of the Company’s issued and outstanding common stock as of the Closing Date, entered into the Voting and Lockup Agreements with the Company. In addition, the Company entered into separate Buyer Voting Agreements with each of the June Buyers with terms consistent with the June 2018 Amendment and Exchange Agreements (see below).

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

As of June 30, 2018, the unrestricted principal balance of the June 2018 Convertible Notes was $24,600,000. For the three and six months ended June 30, 2018, the Company recognized $5,300 of interest expense pertaining to the June 2018 Convertible Notes and had $5,300 of accrued interest as of June 30, 2018.

Exchange of Warrants for Common Shares

On June 28, 2018, the Company entered into separate June 2018 Amendment and Exchange Agreements (each, an “Exchange Agreement”) with the holders (each, a “Holder” and collectively, the “Holders”) of certain warrants to purchase shares of the Company’s common stock for the purpose of exchanging outstanding warrants to purchase an aggregate of 106,437 (26,609,269 pre-split) shares of common stock (the “June Exchange Warrants”) for an aggregate of 90,472 (22,617,879 pre-split) shares of common stock (collectively, the “June Exchange Shares”), based on a ratio of 0.85 June Exchange Shares for each warrant share. As a result, the June Exchange Warrants have been cancelled.

On June 28, 2018, each Holder that was not a party to the June Securities Purchase Agreement entered into a voting agreement with the Company (each, a “Voting Agreement” and collectively, the “Voting Agreements”). Pursuant to the Voting Agreements, each Holder agreed to vote the June Exchange Shares and any shares of common stock the Holder owns or may acquire (collectively, the “Holder Securities”) at any meeting of stockholders of the Company: (a) in favor of (i) approval of resolutions providing for the January 2018 Notes Stockholder Approval, (ii) an increase in the authorized shares of the Company and (iii) a reverse stock split of the common stock; and (b) against any proposal or any other corporate action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Transaction Documents (as defined in the June Securities Purchase Agreement) or the Transaction Documents (as defined in the January Securities Purchase Agreement) or which could result in any of the conditions to the Company’s obligations under the Transaction Documents (as defined in the June Securities Purchase Agreement) or the Transaction Documents (as defined in the January Securities Purchase Agreement), as applicable, not being fulfilled. The agreements to vote the Holder Securities described above terminate immediately following the occurrence of the January 2018 Notes Stockholder Approval described above.

The Voting Agreements also required that, at any time on or prior to the record date for the meeting of stockholders of the Company at which the Company obtained the January 2018 Notes Stockholder Approval, each Holder would not sell or transfer any of the June Exchange Shares. However, the Holders (or their designees, as applicable) were not prohibited from (i) using their Holder Securities to cover the Holders’ or their respective affiliates’ Short Sales (as defined in SEC Regulation SHO) outstanding as of the date of the Voting Agreement, (ii) lending any of their Holder Securities to any person, or (iii) pledging any of the Holder Securities to any person.

In connection with the Exchange Agreements, on June 28, 2018, each Holder entered into a leak-out agreement with the Company (each a “Leak-Out Agreement” and collectively, the “Leak-Out Agreements”), which restricted each Holder from selling the June Exchange Shares during certain periods. Pursuant to the Leak-Out Agreements, for a period ending on the earlier of (x) July 23, 2018 and (y) the Stock Split Stockholder Approval Date (as defined in the June Securities Purchase Agreement) (such earlier date, the “Lock-Up End Date”), the Holder was not, after the date of the Leak-Out Agreement, to sell any of the June Exchange Shares. However, the Holders (or their designees, as applicable) were not prohibited from (i) using their Holder Securities to cover the Holders’ or their respective affiliates’ Short Sales (as defined in SEC Regulation SHO) outstanding as of the date of the Leak-Out Agreement, (ii) lending any of their Holder Securities to any person, or (iii) pledging any of their Holder Securities to any person. In addition, subject to certain exclusions, Holders and any Trading Affiliates (as defined in the Leak-Out Agreements) were be restricted from selling specified amounts of their June Exchange Shares for up to fifteen calendar days after the Lock-Up End Date, unless certain events, as described in the Leak-Out Agreements, earlier terminated such restrictions.

On June 28, 2018, the Company and the Required Holder (as defined in the June Securities Purchase Agreement), entered into an amendment to the June Securities Purchase Agreement (“Amendment No. 1 to Securities Purchase Agreement”), pursuant to which the Stockholder Meeting Deadline (as defined in the June Securities Purchase Agreement) was amended from July 18, 2018 to July 23, 2018.

The collective June Exchange Warrants which were exchanged in this transaction, were all recorded as liabilities at fair value upon issuance, and marked to market at each balance sheet date. The June Exchange Warrants were valued through the date of exchange, June 28, 2018, based upon the original terms of the agreements with changes in fair value recorded in the as gain/loss on warrant liability. The June Exchange Warrants were then valued on the same day based on the fair value of the common shares into which they were converted (0.85 June Exchange Shares for each warrant), and the difference in the fair value between the two instruments was recorded as gain/loss on exchange of warrant. The fair value determined on June 28, 2018 then became the consideration received for the issuance of the common stock. The excess of the consideration received over the par value of the common stock was recorded as Additional Paid in Capital. Accordingly, the incremental change in fair value between the Investor Warrant and the Exchange Warrant is calculated as $301,500 and recorded as Gain on Exchange of Warrants.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Placement Agent Notes and Warrants

The Company entered into an agreement with a placement agent (the “Placement Agent”) for assistance with the placement of the February 2017 Notes. The Placement Agent accepted from the Company a 5-year warrant (each, a “February Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The February Placement Agent Warrants allow the purchase of up to 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the February 2017 Notes may be converted. Through the first nine months of 2017, the Company received $5,000,000 of cash payments for the February 2017 Notes, resulting in the issuance of February Placement Agent Warrants for the purchase of 533 (133,334 pre-split) shares of common stock at an exercise price of $750 ($3.00 pre-split) per share. As of June 30, 2018, the Placement Agent has not elected to exercise any February Placement Agent Warrants. 

The Company entered into an agreement with the Placement Agent for assistance with the placement of the August 2017 Notes and Investor Warrant. The Placement Agent accepted from the Company a 5-year warrant (each, an “August Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The August Placement Agent Warrants allow the purchase of up to 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the Additional Series A Note and the Series B Note in the combined principal amount of $9,050,000 becomes convertible at an exercise price equal to the greater of the exercise price of the August 2017 Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement Agent becomes entitled to the August Placement Agent Warrants. During the period ended December 31, 2017, the Company received $8,800,000 of cash payments in conjunction with the August 2017 Notes and issued August Placement Agent Warrants for the purchase of 704 (176,000 pre-split) shares of common stock at exercise prices of $750 ($3.00 pre-split) and $3,568 ($14.27 pre-split) per share. As of June 30, 2018, the Placement Agent has not elected to exercise any August Placement Agent Warrants. 

The Company entered into an agreement with the Placement Agent for assistance with the placement of the November 2017 Notes. The Placement Agent accepted from the Company a 5-year warrant (each, a “November Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The November Placement Agent Warrants allow the purchase of up to 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the November Series A Note and the November 2017 Notes in the combined principal amount of $100,000,000 becomes convertible at an exercise price equal to the greater of the exercise price of the November 2017 Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement Agent becomes entitled to the November Placement Agent Warrants. During the period ended June 30, 2018, the Company received $25,077,889 of cash payments for the November 2017 Notes resulting in the issuance of 272 (67,987 pre-split) warrants at an exercise prices of $301.50 ($12.06 pre-split) per share. As of June 30, 2018, the Placement Agent has not elected to exercise any November Placement Agent Warrants.

The Company entered into an agreement with the Placement Agent for assistance with the placement of the January 2018 Notes. The Placement Agent accepted from the Company a 5-year warrant (each, a “January Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The January Placement Agent Warrants allow the purchase of up to 8% of the number of shares of the Company’s common stock into which the unrestricted principal of the Series A-1 Note and the Series B-1 Note in the combined principal amount of $0 becomes convertible at an exercise price equal to the greater of the exercise price of the January 2018 Notes and the consolidated closing bid price of the Company’s common stock on the date that the Placement Agent becomes entitled to the January Placement Agent Warrants. During the period ended June 30, 2018, the Company received $35 million of cash payments for the January 2018 Notes resulting in the issuances of 699 (174,826 pre-split) warrants at an exercise prices of $2,860 ($11.44 pre-split) per share. As of June 30, 2018, the Placement Agent has not elected to exercise any January Placement Agent Warrants.

The Company entered into an agreement with the Placement Agent for assistance with the placement of the June 2018 Financing. The Placement Agent accepted from the Company a 5-year warrant (each, a “June Placement Agent Warrant”) as partial payment for the Placement Agent’s services. The June Placement Agent Warrants allow the purchase of up to 8% of the number of shares of the Company’s common stock determined by dividing the aggregate purchase price of the Preferred Stock purchased by the Conversion Price of the June 2018 Convertible Notes in effect as of the Subscription Date (as defined in the June Placement Agent Warrant) and eight percent (8%) of the number of shares of common stock into which any Unrestricted Principal of the June 2018 Convertible Notes purchased is initially convertible at the Conversion Price in effect as of the Subscription Date, at an exercise price equal to the Conversion Price of the June 2018 Convertible Notes in effect as of the Subscription Date, without regard to any adjustment of the Conversion Price resulting from the anti-dilution provision of the June 2018 Convertible Notes, other than proportionate adjustments to the Conversion Price resulting from stock splits or combinations or similar proportionately applied changes to the Company’s outstanding common stock. During the period ended June 30, 2018, the Company issued 3,200 (800,000 pre-split) warrants at an exercise prices of $250 ($1.00 pre-split) per share. As of June 30, 2018, the Placement Agent has not elected to exercise any January Placement Agent Warrants.

Under ASC 210-20-45-1, management offset the Senior Secured Convertible Notes by the corresponding investor notes payable to the Company that the Company received as partial payment for the Senior Secured Convertible Notes (collectively, the “Investor Notes”) yet to be funded. As of June 30, 2018, the unfunded portion of the Investor Notes remaining was $228,672,111.

The carrying value of the Senior Secured Convertible Notes is comprised of the following:

During the three months ended June 30, 2018, the Investor has converted a total of $25,926,889 in principal and $3,980,228 in interest into 411,448 (61,717,150 pre-split) shares of the Company’s common stock and for the six months ended June 30, 2018, the Investor has converted a total of $30,432,329 in principal and $3,980,228 in interest into 251,546 (62,886,625  pre-split) shares of the Company’s common stock.

Common Stock

On February 5, 2018, the Company’s stockholders approved an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock from 100,000,000 to 500,000,000 shares (the “Charter Amendment”). Following stockholder approval of the Charter Amendment, a Certificate of Amendment to the Company’s Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on February 8, 2018, at which time the Charter Amendment became effective.

On July 23, 2018, the Company’s stockholders approved an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of common stock from 500,000,000 to 5,000,000,000 shares and to increase the total number of authorized shares of capital stock from 502,000,000 to 5,002,000,000 (the “Authorized Share Increase”), of which 2,000,000 shares with a par value of one cent ($0.01) per share shall be designated as “Preferred Stock” and 5,000,000,000 shares with a par value of one cent ($0.01) per share shall be designated as “Common Stock.” Following the stockholder approval, a Certificate of Amendment to the Company’s Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on July 23, 2018, at which time the Authorized Share Increase became effective.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Preferred Stock

On June 25, 2018, the Company filed an amended Certificate of Incorporation in the State of Delaware to designate 20,500 shares of preferred stock as the Preferred Stock.

The following is a description of the Preferred Stock:

Dividends

The Preferred Stock does not accrue dividends.

Conversion

The Preferred Stock is not convertible into common stock.

Voting Rights

Each share of Preferred Stock is entitled to 3,205 votes per share on all matters on which holders of common stock are entitled to vote. However, the amount of votes with respect to the Preferred Stock held by any holder, when aggregated with any other voting securities of the Company held by such holder, cannot exceed 19.9% of the Company’s outstanding voting power calculated as of June 21, 2018 (or such greater percentage allowed by Nasdaq without any stockholder approval requirements).

Redemption

From and after the time when the first 15% of the aggregate principal amount of any June 2018 Convertible Notes is paid or converted in accordance with the terms of the June 2018 Convertible Notes, the Company will have the right to redeem all or a portion of the Preferred Stock at a price per share equal to $0.01, payable, at the Company’s option with cash or shares of common stock or, if required by certain beneficial ownership limitations, rights to receive common stock.

Transfer

The shares of Preferred Stock are transferable, subject to limitations, as defined, and applicable securities laws.

Liquidation Preference

Upon any liquidation, dissolution or winding up of the Company, the holders of the shares of Preferred Stock will be entitled to receive in cash out of the assets of the Company, before any amount is paid to the holders of any junior stock, including common stock of the Company, an amount per share of Preferred Stock equal to 100% of the stated value per share (which is equal to $1,000) plus $0.01.

The Certificate of Designations also includes covenants restricting the Company’s ability to take certain actions without the approval of at least a majority of the outstanding shares of the Preferred Stock.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the Company’s consolidated balance sheets as of June 30, 2018 and December 31, 2017:

The table below provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the six months ended June 30, 2018:

The fair value of the derivative conversion features and warrant liabilities as of June 30, 2018 and December 31, 2017 were calculated using a Monte Carlo option model valued with the following weighted average assumptions:

Changes in the observable input values would likely cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable input (probability of a down round event) used in the fair value measurement is the estimation of the likelihood of the occurrence of a change in the contractual terms of the financial instruments. A significant increase (decrease) in this likelihood would result in a higher (lower) fair value measurement.

At any given time, certain of the Company’s embedded conversion features on debt and outstanding warrants may be treated as derivative liabilities for accounting purposes under ASC 815-40 due to insufficient authorized shares to settle these outstanding contracts.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Company has a stock-based compensation plan, which is described as follows:

On March 3, 2014, the Board of Directors approved and adopted the Helios and Matheson Analytics Inc. 2014 Equity Incentive Plan (the “2014 Plan”) which the Company’s stockholders approved at the annual stockholders’ meeting on May 5, 2014. The 2014 Plan as amended set aside and reserved 12,000 (3,000,000 pre-split) shares of the Company’s common stock for grant and issuance in accordance with its terms and conditions. Persons eligible to receive awards from the 2014 Plan include employees (including officers and directors) of the Company and its affiliates, consultants who provide significant services to the Company or its affiliates, and directors who are not employees of the Company or its affiliates (the “Participants”). The 2014 Plan permits the Company to issue to Participants qualified and/or non-qualified options to purchase the Company’s common stock, restricted common stock, performance units, and performance shares. The 2014 Plan will terminate on March 3, 2024. The Company’s Board of Directors is responsible for administration of the 2014 Plan and has the sole discretion to determine which Participants will be granted awards and the terms and conditions of the awards granted. The 2014 Plan also provides for an annual automatic increase in the number of shares of common stock authorized for issuance thereunder by the lesser of (A) 12,000 (3,000,000 pre-split) shares of the Company’s common stock or the equivalent of such number of shares after the administrator of the 2014 Plan, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction; (B) a number of shares of common stock equal to 5% of the Company’s common stock outstanding on January 2nd of each year, and (C) an amount determined by the Company’s Board of Directors. A total of 10,440 (2,610,000 pre-split) shares of common stock remained available for issuance as of June 30, 2018.

As of June 30, 2018 there have not been any stock option grants made pursuant to the 2014 Plan.

From time to time the Board of Directors has also authorized the issuance of shares of common stock outside of the 2014 Plan to consultants and employees for services rendered. During the three and six months ended June 30, 2018 the Company awarded 1,927 (481,750 pre-split) and 2,027 (506,750 pre-split) shares, respectively, to consultants who provided services to the Company. In connection with such awards (including awards granted in 2017) the Company recorded stock compensation expense of $1,911,144 and $5,681,161 which is included in selling, general and administrative expenses for the three and six months ended June 30, 2018, respectively. Unamortized stock compensation costs related to these awards at June 30, 2018 of $482,521 will be recognized over the anticipated service period during the balance of 2018. The Company issued 2,000 (500,000 pre-split) and 4,809 (1,202,167 pre-split) shares of common stock to employees and consultants for services provided during 2017 during the three and six months ended June 30, 2018, respectively. The Company recognized expense in 2017 of $15,631,605, with respect to such awards, and also recorded a liability on the balance sheet at December 31, 2017, related to these costs which were settled in shares.

The shares historically issued both pursuant to the 2014 Plan and outside the 2014 Plan have been fully vested in certain cases and subject to vesting conditions in other cases; they generally contain resale or transfer restrictions pursuant to lock up agreements ranging from 18 to 24 months from the award date. 

The Company generally recognizes stock compensation expense on the grant date and over the period of vesting or period that services will be provided. Compensation associated with shares issued or to be issued to consultants and other non-employees is recognized over the expected service period beginning on the measurement date which is generally the time the Company and the service provider enter into a commitment whereby the Company agrees to grant shares in exchange for the services to be provided. 

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

MoviePass, Inc.

MoviePass maintained the 2011 Equity Incentive Plan (the “2011 Plan”) during the six months ended June 30, 2018. The 2011 Plan provides for the grant of up to 95,000,000 shares of common stock for issuance as non-statutory or incentive stock options, stock appreciation rights, restricted stock and restricted stock units to the employees, officers, directors, or consultants of MoviePass. The 2011 Plan is administered by the Board of Directors of MoviePass, which selects the individuals to whom options will be granted, and 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 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.

For the six months ended June 30, 2018 MoviePass granted 39,809,175 stock options at an exercise price of $0.43 per share.

The following table summarizes stock option activity under the MoviePass share-based plan for the six months ended June 30, 2018:

The weighted average grant date fair value per share of stock options granted during the six months ended June 30, 2018 was $0.16. No options were exercised during the six months ended June 30, 2018.

The Company recognized share-based payment expense associated with stock options of $1,090,932 and $3,087,244 for the three and six months ended June 30, 2018, respectively.

The following table summarizes the weighted-average assumptions used to compute the fair value of options granted to employees:

There were no options granted to the Company’s Board of Directors or third parties during the six months ended June 30, 2018.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

Consulting

For the three months ended June 30, 2018 and June 30, 2017, respectively, 4 customers accounted for 93.5% and 4 customers accounted for 92.8% of consulting revenues.

For the six months ended June 30, 2018 and June 30, 2017, respectively, 4 customers accounted for 93.9% and 4 customers accounted for 87.3% of consulting revenues.

As of June 30, 2018 and December 31, 2017, respectively, 5 customers accounted for 87.4% and 4 customers accounted for 62.6% of consulting accounts receivables.

As of June 30, 2018 and December 31, 2017, respectively, 3 vendors accounted for 93.4% and 3 vendors accounted for 82.7% of consulting accounts payables.

Technology

As of June 30, 2018 and December 31, 2017, respectively, 4 vendor accounted for 69.1% and 3 vendors accounted for 60.8% of technology accounts payables.

Subscription and Marketing and Promotional Services

As of June 30, 2018 and December 31, 2017, respectively, 1 customer accounted for 82.4% of subscription and marketing and promotional services accounts receivables and 2 customers accounted for 100.0% for subscription and marketing and promotional services accounts receivables.

As of June 30, 2018 and December 31, 2017, respectively, 2 vendors accounted for 39.3% subscription and marketing and promotional services accounts payables and 1 vendor accounted for 41.0% of subscription and marketing and promotional services accounts payables.

The Company’s operating lease commitments as of June 30, 2018 are comprised of the following:

The Company’s executive office is located at the Empire State Building, 350 Fifth Avenue, Suite 7520, New York, New York 10118. The Company’s executive office is located in a leased facility with a term expiring on June 30, 2022. Zone leases office space at 444 Brickell Avenue, Miami Florida with a term expiring on April 30, 2020. As of June 30, 2018 MoviePass leased space at WeWork on a month to month basis at 175 Varick Street New York, NY 10014. As of August 1, 2018 MoviePass has relocated to WeWork at 135 Madison Avenue New York, NY 10016 under a one-year lease agreement effective July 9, 2018. In addition, the Company’s Indian subsidiary has an office in Bangalore, India at a leased facility located at 3rd Floor, Beta Block, Number 7 Sigma Tech Park, Varthur Kodi, Bangalore 560066. This lease was amended on September 26, 2017 to extend the duration of the lease until September 30, 2019.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Company’s executive office lease is subject to escalations based on increases in real estate taxes and operating expenses, all of which are charged to rent expense. Rent expense for the three months ended June 30, 2018 and 2017 was approximately $247,743 and $86,217, respectively, and $461,088 and $134,017 for the six months ended June 30, 2018 and 2017, respectively. 

In April 2017, Zone signed a three-year lease agreement for office space in Miami. The lease term began in May 2017 and expires in April 2020 and requires a monthly rent payment of $5,026 for the first 12 months, $5,177 for the next 12 months, and $5,332 for the last 12 months of the lease.

As of June 30, 2018, the Company does not have any “Off Balance Sheet Arrangements”.

Legal Proceeding :

On August 2, 2018, Jeffrey Chang, a purported stockholder of the Company, acting on behalf of himself and a putative class of persons who purchased or otherwise acquired the Company’s common stock between August 15, 2017, and July 26, 2018, filed a class action complaint in the U.S. District Court for the Southern District of New York against the Company and two of its executive officers, Theodore Farnsworth and Stuart Benson (the “August 2, 2018 Complaint”). Jeffrey Chang v. Helios and Matheson Analytics Inc., et. al., Case No. 1:18-cv-6965. The August 2, 2018 Complaint alleges, among other things, that the Company’s statements to the market were materially false or misleading. The plaintiffs assert claims under Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5.

On August 13, 2018, Jeffrey Braxton, a purported stockholder of the Company, acting on behalf of himself and a putative class of persons who purchased or otherwise acquired the Company’s common stock between August 15, 2017, and July 26, 2018, filed a class action complaint in the U.S. District Court for the Southern District of New York against the Company and two of its executive officers, Theodore Farnsworth and Stuart Benson (the “August 13, 2018 Complaint”). Jeffrey Braxton v. Helios and Matheson Analytics, Inc. et al., Case No. 1:18-cv-07242-UA. The August 13, 2018 Complaint makes substantially identical allegations as the August 2, 2018 Complaint.

The Company intends to vigorously defend these matters and believes that they are without merit. Given the preliminary status of the litigation, it is difficult to predict the likelihood of an adverse outcome or estimate the amount or range of any reasonably possible losses, if any.

Gadiyaram Agreements

On October 5, 2017, the Company entered into a consulting agreement (the “Consulting Agreement”) with Mr. Muralikrishna Gadiyaram (the “Consultant”), a director of the Company, for a period of two years from the agreement date (the “Consulting Term”). The Consulting Agreement formalized, on a compensatory basis, the arrangement that was in place for performance without compensation by the Consultant for consulting services since the acquisition of Zone in November of 2016. Mr. Gadiyaram will continue to provide guidance to the Company and Zone relating to the further development of their respective businesses and technologies. In addition to the aforementioned services, if requested by the Company, Mr. Gadiyaram will provide guidance with respect to the development of any businesses or technologies that the Company or Zone may acquire during the Consulting Term, including, but not limited to, MoviePass. Pursuant to the Consulting Agreement, the Consultant will receive fees in the amount of $18,750 per month in cash. Such fees have been accrued and paid by the Company since January 1, 2017. The amount payable to Mr. Gadiyaram as of June 30, 2018 was approximately $18,750.

On May 22, 2018, the Company and Helios and Matheson Information Technology, Ltd (“HMIT”), an Indian corporation, owned and controlled by Mr. Muralikrishna Gadiyaram, a director of the Company executed a letter agreement whereby HMIT agreed not to sell HMNY shares held by HMIT until after April 15, 2019 (the “Lockup Agreement”). In exchange for such Lockup Agreement the Company agreed to issue to HMIT 2,000 (500,000 pre-split) shares of HMNY stock. As of June 30, 2018, the shares issuable to HMIT had not yet been issued and accordingly, the Company accrued $225,000 with respect thereto, representing the value of the shares on May 22, 2018.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Company had a tax provision for the three months ended June 30, 2018 and 2017 of $28,719 and $11,373, respectively, and $36,670 and $41,857 for the six months ended June 30, 2018 and 2017, respectively. Tax for both the six months ended June 30, 2018 and 2017 was comprised of minimum state taxes and a provision for tax in respect to taxes incurred by the Company’s Indian subsidiary.

The Company’s provision for income taxes for the six months ended June 30, 2018 and 2017 is based on the estimated annual effective tax rate method prescribed by ASC 740-270, plus discrete items. The difference between the Company’s effective tax rates for the six months ended June 30, 2018 and 2017 and the US statutory tax rates of 21% and 35%, respectively, primarily relates to changes in the valuation allowances against deferred tax assets, non-deductible expenses, state income taxes (net of federal income tax benefit), the effect of taxes on foreign earnings, and changes to provisional amounts recorded for certain aspects of the Act. 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that either some portion or the entire deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, tax-planning strategies, and available carry-back capacity in making this assessment, therefore, the Company has recorded a valuation allowance on its net domestic deferred tax assets, excluding deferred tax liabilities that are not expected to serve as a source of income for the recognition of deferred tax assets due to their indefinite reversal period (tax amortization of goodwill). 

As of June 30, 2018, the Company did not record any tax liabilities for uncertain income tax positions and concluded that all of its tax positions are either certain or are not material to the Company’s financial statements. The Company is currently not under audit in any jurisdiction in which it conducts business.

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision–making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision–making group is composed of the Chief Executive Officer and Chief Financial Officer. The Company operates in three segments, Consulting, Technology, and Subscription and Marketing and Promotional Services. During the three and six months ended June 30, 2018, the Company reported three segments. The Company allocates corporate expenses to the segments for purposes of individually measuring operating segments. Corporate expenses are allocated on the basis of each segment’s relative earnings prior to the allocation.

HELIOS AND MATHESON ANALYTICS INC.

Notes to Condensed Consolidated Financial Statements

The Company evaluates performance of its operating segments based on revenue and operating loss. The following table summarizes the Company’s segment information for the following balance sheet dates presented, and for the three and six months ended June 30, 2018 and 2017: