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<P id=PARA3 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 12pt; FONT-FAMILY: Times New Roman, Times, serif"><B>UNITED STATES<BR>SECURITIES AND EXCHANGE COMMISSION</B> </FONT></P>
<P id=PARA5 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Washington, DC 20549</B> </FONT></P>
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<P id=PARA6 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 18pt; FONT-FAMILY: Times New Roman, Times, serif"><B>FORM 8-K</B></FONT></P>
<P id=PARA8 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>CURRENT REPORT<BR>Pursuant to Section&nbsp;13 or 15 (d) of the Securities Exchange Act of 1934</B> </FONT></P>
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<P id=PARA10 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Date of Report (Date of earliest event reported): December 1, 2016</FONT></P>
<P id=PARA11 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>&nbsp;</B></FONT></P>
<P id=PARA12 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 18pt; FONT-FAMILY: Times New Roman, Times, serif"><B>HELIOS AND MATHESON ANALYTICS INC.</B></FONT></P>
<P id=PARA13 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">(Exact name of Registrant as specified in charter)</FONT></P>
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<P id=PARA19 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Delaware</B></FONT></P>
<P id=PARA20 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">(State or other jurisdiction<BR>of incorporation) </FONT></P></TD>
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<P id=PARA22 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>0-22945</B></FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><BR>(Commission File Number) </FONT></P></TD>
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<P id=PARA24 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>13-3169913</B></FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><BR>(IRS Employer<BR>Identification Number)</FONT></P></TD></TR></TABLE>
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<P id=PARA27 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Empire State Building </B></FONT></P>
<P id=PARA28 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>350 5</B><SUP style="vertical-align: baseline; position: relative; bottom:.33em;"><B>th</B></SUP><B> Avenue</B></FONT></P>
<P id=PARA29 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>New York, New York 10118</B></FONT></P>
<P id=PARA30 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">(Address of principal executive offices)</FONT></P>
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<P id=PARA31 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Registrant&#8217;s telephone number, including area code: <B>(212) 979-8228</B></FONT></P>
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<P id=PARA33 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions (see General Instruction A.2 below). </FONT></P>
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<P id=PARA46 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Soliciting material pursuant to Rule&nbsp;14a-12 under the Exchange Act (17 CFR240.14a-12)</FONT></P></TD></TR>
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<P id=PARA52 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Pre-commencement communications pursuant to Rule&nbsp;14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)).</FONT></P></TD></TR>
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<P id=PARA66 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Item 1.01.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Entry Into a Material Definitive Agreement.</B></FONT></P>
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<P id=PARA68 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><U>Sale of Senior Secured Convertible Notes</U></B></FONT></P>
<P id=PARA69 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA70 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The following does not purport to be a complete description of the Securities Purchase Agreement, the Senior Secured Convertible Notes, the Investor Note, the Registration Rights Agreement, the Security and Pledge Agreement, the Guaranty, the Voting and Lockup Agreement and the Placement Agent Warrant described in this Current Report and each is qualified in its entirety by reference to the full text of such document. Such documents are attached as exhibits to this Current Report and are incorporated herein by reference.</FONT></P>
<P id=PARA71 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA72 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Capitalized terms used in the discussion below but not defined are defined in the form of the Senior Secured Convertible Note attached as Exhibit 10.2 to this Current Report.</FONT></P>
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<P id=PARA74 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><I>Securities Purchase Agreement</I></B></FONT></P>
<P id=PARA75 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA76 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">On December 1, 2016, pursuant to a Securities Purchase Agreement (&#8220;SPA&#8221;) entered into by Helios and Matheson Analytics Inc. (the &#8220;Company&#8221;), an institutional investor (the &#8220;Investor&#8221;) and Palladium Capital Advisors LLC (&#8220;Palladium&#8221;), the Company agreed to sell and issue two Senior Secured Convertible Notes to the Investor in the aggregate principal amount of $6,720,000 (each, a &#8220;Note&#8221; and collectively, the &#8220;Notes&#8221;) for consideration consisting of (i) a cash payment by the Investor in the amount of $1,100,000 and (ii) a secured promissory note payable by the Investor to the Company (the &#8220;Investor Note&#8221;) in the principal amount of $4,900,000 (the &#8220;Purchase Price Balance&#8221;) (collectively, the &#8220;Note Financing&#8221;). The Note in the aggregate original principal amount of $1,820,000 is referred to as the &#8220;Initial Note&#8221;. The Note in the aggregate original principal amount of $4,900,000 is referred to as the &#8220;Additional Note&#8221;. The Note Financing was made pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) promulgated thereunder. The Company will use all the proceeds from the sale of the Notes for general corporate purposes.</FONT></P>
<P id=PARA77 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA78 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">If </FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">the Company proposes to undertake a subsequent offering of its securities, subject to certain customarily exempt securities (a &#8220;Subsequent Placement&#8221;), at any time on or prior to the later of (x) the date the Notes held by the Investor are no longer outstanding and (y) the second anniversary of the closing date of the SPA (the &#8220;Closing Date&#8221;)</FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">, the Investor will have the right to subscribe for up to 50% of the securities offered. </FONT></P>
<P id=PARA79 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA80 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">As required by the SPA, the Company obtained the written consent of the holders of a majority of its common stock approving the Note Financing and the potential&nbsp;issuance of more than 20% of the Company&#8217;s issued and outstanding common stock in connection with the Note Financing, in accordance with Nasdaq Listing Rule 5635.</FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"> The Company is also required to file with the Securities and Exchange Commission, no later than January 16, 2016, and mail to its other stockholders, a definitive information statement in compliance with Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended.</FONT></P>
<P id=PARA81 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA82 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The SPA requires the Company to reimburse the Investor for all reasonable costs and expenses incurred by the Investor or its affiliates in connection with the structuring, documentation, negotiation and closing of the Note Financing.</FONT></P>
<P id=PARA83 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
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<P id=PARA242.2 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">&nbsp;</FONT></P><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"></FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"></FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"></FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">
<P id=PARA84 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><I>Investor Note</I></B></FONT></P>
<P id=PARA85 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA86 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Investor Note will be payable in full eight months from the Closing Date. The Investor&#8217;s obligation to pay the Company the Purchase Price Balance pursuant to the Investor Note is to be secured by $4.9 million, in the aggregate, in cash, cash equivalents, any Group of Ten (&#8220;G10&#8221;) currency and any notes or other securities issued by any G10 country. The Company will receive that portion of the Purchase Price Balance then due upon each voluntary or mandatory prepayment of the Investor Note. On or after December 31, 2016 (or earlier if the Company permits), the Investor may, at its option and at any time, voluntarily prepay the Investor Note, in whole or in part. The Investor Note is also subject to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the following mandatory prepayment events:</FONT></P>
<P style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt">&nbsp;</P>
<P id=PARA249 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">(1) Mandatory Prepayment upon Conversion of Initial Note &#8211; At any time the Investor has converted $1,820,000 or more in principal amount of the Initial Note, the Investor will be required to prepay the Investor Note, on a dollar-for-dollar basis, for each subsequent conversion of the Additional Note.</FONT></P>
<P id=PARA242.1 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">&nbsp;</FONT></FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"></FONT></P>
<P id=PARA90 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">(2) Mandatory Prepayment upon Mandatory Prepayment Notices &#8211; The Company may require the Investor to prepay the Investor Note by delivering a mandatory prepayment notice to the Investor, subject to (i) the satisfaction of certain equity conditions, and (ii) the Investor&#8217;s receipt of a valid written notice by the Company electing to effect a mandatory conversion of Restricted Principal (defined as $4.9 million of the principal amount of the Notes), not in excess of the Maximum Mandatory Share Amount or the Maximum Mandatory Conversion Amount (each as defined below under the heading <I>Conversion of the Notes</I>).</FONT></P>
<P id=PARA91 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA92 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Investor Note also contains certain optional offset rights of the Company and the Investor, which if exercised, would reduce the amount outstanding under the Note and the Investor Note by the same amount and, accordingly, the cash proceeds received by the Company from the Investor pursuant to the Note Financing.</FONT></P>
<P id=PARA93 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA94 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><I>Placement Agent Warrant</I></B></FONT></P>
<P id=PARA95 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA250 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">On the Closing Date, the Company will issue a 5-year warrant (the &#8220;Placement Agent Warrant&#8221;) to Palladium as partial payment for its placement agent services. The Placement Agent Warrant allows Palladium to purchase 22,000 shares (the &#8220;Warrant Shares&#8221;) of the Company&#8217;s common stock at an exercise price per share equal to the greater of $4.45 and the closing bid price of the Company&#8217;s Common Stock on the Nasdaq Capital Market on the Closing Date. If, after the first anniversary of the Closing Date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares by Palladium, then the Placement Agent Warrant may also be exercised, in whole or in part, by means of a &#8220;cashless exercise&#8221;. The Placement Agent Warrant may not be exercised if, after giving effect to the exercise Palladium, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company&#8217;s common stock outstanding immediately after giving effect to the issuance of the Warrant Shares. Upon not less than 61 days&#8217; prior notice to the Company, Palladium may increase or decrease the ownership limitation, provided that the ownership limitation in no event exceeds 9.99% of the number of shares of the Company&#8217;s common stock outstanding immediately after giving effect to the issuance of the Warrant Shares.</FONT></P>
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<P id=PARA98 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><I>The Notes </I></B></FONT></P>
<P id=PARA99 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA100 style="TEXT-ALIGN: left; MARGIN: 0pt 0pt 0pt 36pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>Principal Amount</I></FONT></P>
<P id=PARA101 style="TEXT-ALIGN: left; MARGIN: 0pt 0pt 0pt 36pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>&nbsp;</I></FONT></P>
<P id=PARA102 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The aggregate principal amount of the Notes is $6,720,000.</FONT></P>
<P id=PARA103 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA104 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>Maturity Date</I></FONT></P>
<P id=PARA105 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA106 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Unless earlier converted or redeemed, the Notes mature 8 months from the Closing Date.</FONT></P>
<P id=PARA107 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA108 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>Interest and Payment of Interest</I></FONT></P>
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<P id=PARA243.2 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">&nbsp;</FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"></FONT></P>
<P id=PARA110 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Notes bear interest at a rate of 6% per annum, subject to an increase to 12% during the first 30 days following the occurrence and continuance of an Event of Default and to 18% thereafter. Interest on the Notes will be payable in arrears commencing on January 1, 2017 and quarterly thereafter, beginning on April 1, 2017 and, so long as the Equity Conditions have been satisfied, may be paid in shares of common stock at the Company&#8217;s option. The Company may also elect to pay interest in whole or in part in cash. Interest on the Notes is computed on the basis of a 360-day year and twelve 30-day months.</FONT></P>
<P id=PARA111 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA112 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>Conversion of the Note</I></FONT></P>
<P id=PARA113 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA114 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Investor may, at any time, elect to convert the Notes into shares of the Company&#8217;s common stock at the Conversion Price, subject to certain beneficial ownership limitations described below. The Conversion Price is $4.45.</FONT></P>
<P id=PARA115 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA116 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Investor also has the right to convert the Notes into shares of the Company&#8217;s common stock at the Alternate Conversion Price, subject to certain beneficial ownership limitations described below. The Alternate Conversion Price is defined as the lowest of (i) the Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, (ii) $4.00 for the Initial Note (subject to proportionate adjustment for stock splits, dividends and combinations), and (iii) the greater of (I) the Floor Price ($4.00) and (II) 85% of the quotient of (x) the sum of the volume weighted average price of the Company&#8217;s common stock for each of the five consecutive Trading Days ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable conversion notice, divided by (y) 5, for the Additional Note</FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">.</FONT></P>
<P id=PARA117 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA118 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">If the Equity Conditions are satisfied, the Company may require the holders of the Notes to convert all or any part of the Notes, up to the Maximum Mandatory Share Amount and the Maximum Mandatory Conversion Amount (each, a &#8220;Mandatory Conversion&#8221;). If on the fifth Trading Day immediately following a Mandatory Conversion Date and on each fifth Trading Day thereafter through and including the fifteenth Trading Day immediately following such Mandatory Conversion Date (each, a &#8220;True-Up Date&#8221;) the True-Up Price is less than the applicable Mandatory Conversion Price, the Company must deliver to the holders of the Notes an additional number of shares of common stock equal to the difference between the number of shares of common stock delivered to the holders as a result of the Mandatory Conversion and the number of shares determined by dividing the principal, interest and late charges converted by the True-Up Price. The &#8220;True-Up Price&#8221; is defined as 85% of the lowest volume weighted average price of the Company&#8217;s common stock on the Trading Day with the lowest volume weighted average price during the 15 consecutive Trading Days following the Mandatory Conversion.</FONT></P>
<P id=PARA119 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA120 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&#8220;Mandatory Conversion Date&#8221; means the third Trading Day following the delivery by the Company of a Mandatory Conversion Notice.</FONT></P>
<P id=PARA121 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA122 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&#8220;Mandatory Conversion Price&#8221; means, with respect to any Mandatory Conversion that price which shall be the lowest of (i) the Conversion Price as in effect on the applicable Mandatory Conversion Date, (ii) 80% the sum of (A) the volume weighted average price of the Company&#8217;s common stock for each of the 3 Trading Days with the lowest volume weighted average price of the Company&#8217;s common stock during the 20 consecutive Trading Day period ending on and including the Trading Day immediately prior to the applicable Mandatory Conversion Date by (B) 3.</FONT></P>
<P id=PARA123 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA124 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&#8220;Maximum Mandatory Share Amount&#8221; with respect to any Mandatory Conversion Date means 100% of the quotient of (x) the sum of the composite aggregate daily share trading volume of the Company&#8217;s&nbsp;common stock for each Trading Day during the 5 Trading Day period ending and including the Trading Day immediately prior to the applicable Mandatory Conversion Notice Date, divided by (y) 5.</FONT></P>
<P id=PARA125 style="MARGIN-BOTTOM: 0pt; MARGIN-TOP: 0pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA126 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&#8220;Maximum Mandatory Conversion Amount&#8221; with respect to any Mandatory Conversion Date means the difference of (x) $500,000 less (y) the sum of each Conversion Amount converted under the applicable Note during the 5 Trading Day period ending and including the applicable Mandatory Conversion Date.</FONT></P>
<P id=PARA244.1 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">&nbsp;</FONT></P>
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<P id=PARA244.2 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">&nbsp;</FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"></FONT></P>
<P id=PARA128 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>Beneficial Ownership Limitations on Conversion and Issuance</I></FONT></P>
<P id=PARA129 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA130 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">In addition to the conversion limitations described above, the Notes may not be converted and shares of the Company&#8217;s common stock may not be issued under the Notes if, after giving effect to the conversion or issuance, the applicable holder of a Note together with its affiliates would beneficially own in excess of 9.99% of the Company&#8217;s outstanding shares of common stock. At the Investor&#8217;s option, the ownership limitation blocker may be raised or lowered to any other percentage not in excess of 9.99%, as applicable, except that any raise will only be effective upon 61-days&#8217; prior notice to the Company.</FONT></P>
<P id=PARA131 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA132 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>Redemption of the Note</I></FONT></P>
<P id=PARA133 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA134 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Provided there has been no Equity Conditions Failure, the Company has the right to redeem all, but not less than all, of the amounts remaining unpaid under the Notes. The portion of the Notes subject to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. In the event of a Change of Control, the Investor may require the Company to redeem the Notes in cash at the Change of Control Redemption Price (as defined in the Note).</FONT></P>
<P id=PARA135 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA136 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>Events of Default</I></FONT></P>
<P id=PARA137 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA138 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Notes contain standard and customary Events of Default including but not limited to: (i) failure to register the Company&#8217;s common stock within certain time periods or failure to keep the registration statement effective as required by the Registration Rights Agreement; (ii) failure to maintain the listing of the Company&#8217;s common stock; (iii) failure to make payments when due under the Notes; (iv) breaches of covenants and (iv) bankruptcy or insolvency.</FONT></P>
<P id=PARA139 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA140 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Following an Event of Default, the Investor may require the Company to redeem all or any portion of the Notes. The redemption amount may be paid in cash or with shares of the Company&#8217;s common stock, at the election of the Investor, at a price equal to the Event of Default Redemption Price.</FONT></P>
<P id=PARA141 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA142 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Company must immediately redeem the Notes in cash upon the occurrence of a Bankruptcy Event of Default.</FONT></P>
<P id=PARA143 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA144 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Event of Default Redemption Price will be computed as a price equal to the greater of (i) 125% of the principal, interest and late charges to be redeemed and (ii) the product of (X) the principal, interest and late charges to be redeemed divided by the Conversion Price multiplied by (Y) the product of (1) 125% multiplied by (2) the greatest Closing Sale Price of the Company&#8217;s common stock on any Trading Day during the period commencing on the date preceding such Event of Default and ending on the date the Company makes the entire payment required to be made under the Note.</FONT></P>
<P id=PARA145 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA146 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">In addition, following an Event of Default, the holders of the Notes will have the right to convert the Notes at the &#8220;Alternate Conversion Event of Default Price&#8221; which means, with respect to any Alternate Conversion, that price which shall be the lowest of (i) the Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) 75% of the lowest volume weighted average price of the Company&#8217;s common stock for each of the 30 consecutive Trading Days ending and including the Trading Day of delivery or deemed delivery of the applicable Conversion Notice. </FONT></P>
<P id=PARA147 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA148 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>Fundamental Transactions</I></FONT></P>
<P id=PARA149 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA150 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Notes prohibit the Company from entering into specified transactions involving a change of control unless the successor entity, which must be a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market, assumes in writing all of the Company&#8217;s obligations under the Notes.</FONT></P>
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<P id=PARA245.2 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">&nbsp;</FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"></FONT></P>
<P id=PARA152 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><I>New Debt</I></FONT></P>
<P id=PARA153 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA154 style="TEXT-ALIGN: justify; MARGIN: 0pt 0pt 0pt 7.5pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 28.5pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">With the exception of Permitted Indebtedness the Company has agreed that for a period of 90 days following payment in full of the Notes, it will not incur any other debt.</FONT></P>
<P id=PARA155 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA156 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><I>Security and Pledge Agreements and Guaranty </I></B></FONT></P>
<P id=PARA157 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA158 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">On the Closing Date, the Company and its wholly-owned subsidiaries Zone Technologies, Inc. (&#8220;Zone&#8221;) and HMNY Zone Loan LLC will each enter into a Security and Pledge Agreement in favor of the Investor as Collateral Agent. Pursuant to such Security and Pledge Agreements, the Notes will be secured by a perfected first priority security interest in all of the assets of the Company, Zone and HMNY Zone Loan LLC, subject to Permitted Liens.</FONT></P>
<P id=PARA159 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA160 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Zone and HMNY Zone Loan LLC will also provide a Guaranty to the Investor as Collateral Agent whereby they guarantee the punctual payment of all obligations that accrue after the commencement of any insolvency proceeding of the Company, whether or not the payment of such obligations are enforceable or allowable in the insolvency proceeding, and all fees, interest, premiums, penalties, causes of actions, costs, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Note Financing documents, and agrees to pay any and all costs and expenses (including counsel fees and expenses) incurred by the Collateral Agent in enforcing any rights under the Guaranty or any other Note Financing document.</FONT></P>
<P id=PARA161 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA162 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><I>Registration Rights Agreement</I></B></FONT></P>
<P id=PARA163 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA164 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Under the terms of a Registration Rights Agreement to be entered into with the Investor on the Closing Date, the Company will be required to register for resale the shares of common stock that are issuable upon conversion of the Notes, additional shares that could be used as payment of monthly interest plus an additional number of shares so that the total number of shares of common stock registered equals 125% of the sum of the maximum number of shares issuable upon conversion of the Notes. The Registration Rights Agreement requires the Company to file the registration statement within 30 days after the Closing Date and to have the registration statement declared effective 90 days after the Closing Date (or 120 days after the Closing Date if the registration statement is subject to review by the Securities and Exchange Commission). </FONT></P>
<P id=PARA165 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA166 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Registration Rights Agreement provides for the payment of liquidated damages of one and one-half percent (1.5%) of the product of (x) the number of shares of common stock required by the Registration Rights Agreement to be included in the registration statement and (y) the Closing Sale Price as of the Trading Day immediately prior to the date a Registration Delay Payment, defined as the failure to file the registration statement in the time required, the failure to have the registration statement declared effective in the time required, the failure to maintain the effectiveness of the registration statement or the failure to keep current public information in the marketplace.</FONT></P>
<P id=PARA167 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA168 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Company is required to keep the registration statement effective (and the prospectus contained therein available for use) pursuant to Rule 415 for resales on a delayed or continuous basis at then-prevailing market prices at all times until the earlier of (i) the date as of which the holders of the Notes may sell all of the common stock issuable pursuant thereto without restriction pursuant to Rule 144 or (ii) the date on which all of the common stock covered by the registration statement shall have been sold.</FONT></P>
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<P id=PARA246.2 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">&nbsp;</FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"></FONT></P>
<P id=PARA170 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><I>Voting and Lockup Agreement</I></B></FONT></P>
<P id=PARA171 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA172 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">As a condition to closing the Note Financing, Theodore Farnsworth, the Chairman of the Board of the Company and Chief Executive Officer of Zone, Helios &amp; Matheson Information Technology Ltd., of which Muralikrishna Gadiyaram, a director of the Company, is the chief executive officer, and its wholly-owned subsidiary, Helios &amp; Matheson Inc. (collectively, the &#8220;Majority Stockholders&#8221;), who collectively own approximately 74% of the Company&#8217;s issued and outstanding common stock, will be required to execute a Voting and Lockup Agreement with the Company. Pursuant to the Voting and Lockup Agreement, the Majority Stockholders will agree to vote in favor of the Company&#8217;s issuance of the Notes and the common stock into which the Notes can be converted. The Voting and Lockup Agreement also requires that, for a period beginning on the Closing Date and ending on the date when all of the principal outstanding under the Note issued to the Investor consists of Restricted Principal thereunder, they will not (i) dispose of or agree to dispose of, directly or indirectly, any securities of the Company, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any securities of the Company owned directly by the Majority Stockholders (including holding as a custodian) or (iii) permit to exist any security interest, lien, claim, pledge, option, right of first refusal, agreement, or limitation on the Majority Stockholders&#8217; voting rights, charge or other encumbrance of any nature with respect to the Majority Stockholders&#8217; securities in the Company or (iv) engage in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Majority Stockholders&#8217; securities in the Company or (v) directly or indirectly initiate, solicit or encourage any person to take actions which could reasonably be expected to lead to the occurrence of any of the foregoing.</FONT></P>
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<P id=PARA174 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B><U>Letter Agreement Under September 2016 Convertible Notes</U></B></FONT></P>
<P id=PARA175 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B></B></FONT>&nbsp;</P>
<P id=PARA252 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">In a Current Report on Form 8-K filed by the Company on September 8, 2016, the Company reported that it issued Senior Secured Convertible Notes dated September 7, 2016 (the &#8220;September Convertible Notes&#8221;) to the Investor in the form attached as an exhibit to such Current Report (the &#8220;Original 8-K&#8221;), for consideration consisting of a cash payment to the Company in the amount of $1,000,000 and a promissory note to the Company in the amount of $3,000,000 (the &#8220;September Investor Note&#8221;). The Original 8-K is incorporated by reference in this Current Report.</FONT></P>
<P id=PARA253 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA254 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">On December 1, 2016, pursuant to Section 7(e) of the September Convertible Notes, the Company executed a written notice to the Investor, in the form attached as an exhibit to this Current Report (the &#8220;Letter Agreement&#8221;), that the Company desires the Investor&#8217;s consent to permanently lower the Conversion Price (as defined in the September Convertible Notes) to $4.00 (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events) (the &#8220;Conversion Price Reduction&#8221;), effective upon the Investor&#8217;s voluntary prepayment to the Company of the remaining $900,000 principal balance of the September Investor Note in one lump sum (the &#8220;Investor Prepayment&#8221;), which the Company expects to occur on December 2, 2016.. The Investor consented to the Conversion Price Reduction. </FONT></P>
<P id=PARA255 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA256 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The Letter Agreement also provides that if any of the September Convertible Notes remain outstanding as of January 15, 2017, the Company shall irrevocably deliver either a Mandatory Conversion Notice or a Company Optional Redemption Notice (each as defined under the September Convertible Notes), at the Company&#8217;s option, to each holder of the September Convertible Notes then outstanding (with a request to waive any Equity Conditions Failure (as defined under the September Convertible Notes)) with respect to the remaining $980,000 in principal amount of the September Convertible Notes plus interest thereon and any other amounts then outstanding under the September Convertible Notes. In the event the Company elects to deliver a Mandatory Conversion Notice, the conversion price will be equal to the Mandatory Conversion Price (as defined in the September Convertible Notes, which is the same definition provided above under the heading <I>Conversion of the Note)</I>. In the event the Company elects to deliver a Company Optional Redemption Notice, the redemption price will be equal to 110% of the amount being redeemed, (i) payable in cash in the case of the September Convertible Note with a principal outstanding balance of $900,000 held by the Investor and, (ii) in the case of the September Convertible Note held by Palladium in the principal amount of $80,000 (the &#8220;Palladium Note&#8221;), at the Company&#8217;s election, payable in cash or by exchange of the Palladium Note for an unsecured note in the same amount and otherwise in substantially the same form as the Palladium Note. </FONT></P></FONT>
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<P id=PARA182 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Item 2.03&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Creation of a Direct Financial Obligation or an Obligation under an Off-Balance </B></FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Sheet Arrangement of a Registrant.</B></FONT></P>
<P id=PARA184 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA185 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The information included in Item 1.01 of this Current Report is hereby incorporated by reference into this Item 2.03.</FONT></P>
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<P id=PARA187 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Item 3.02.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Unregistered Sales of Equity Securities.</B></FONT></P>
<P id=PARA188 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA189 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">The information included in Item 1.01 of this Current Report is hereby incorporated by reference into this Item 3.02.</FONT></P>
<P id=PARA190 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA191 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">In addition to issuing the Placement Agent Warrant to Palladium, the Company agreed to pay 8% of the cash proceeds actually received from the Note Financing to Palladium as a placement agent commission. The Company will pay an aggregate cash amount of $88,000 to Palladium as of the Closing Date.</FONT></P>
<P id=PARA192 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA193 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Item 5.07&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Submission of Matters to a Vote of Security Holders.</B></FONT></P>
<P id=PARA194 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA195 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">On December 1, 2016, Theodore Farnsworth, the Chairman of the Board of the Company and Chief Executive Officer of Zone, </FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Helios &amp; Matheson Information Technology Ltd., of which Muralikrishna Gadiyaram, a director of the Company, is the chief executive officer, </FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">and its wholly-owned subsidiary, Helios &amp; Matheson Inc., the owners of 1,740,000 shares, 857,149 shares and 885,891 shares, respectively, of the Company&#8217;s 4,729,367 shares of common stock issued and outstanding, executed a written consent approving (i) the Note Financing and (ii) the issuance of the Notes and the Palladium Warrant to Palladium in payment for its fees, and the potential&nbsp;issuance of more than 20% of the issued and outstanding shares of common stock of the Company pursuant to the conversion features of the Notes, in accordance with Nasdaq Listing Rule 5635.</FONT></P>
<P id=PARA196 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>&nbsp;</B></FONT></P>
<P id=PARA197 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>Item 9.01.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Financial Statements and Exhibits.</B></FONT></P>
<P id=PARA198 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA199 style="TEXT-ALIGN: justify; MARGIN: 0pt; LINE-HEIGHT: 1.25; TEXT-INDENT: 36pt"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">See the Exhibit Index set forth below for a list of exhibits included with this Current Report.</FONT></P>
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<P id=PARA205 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>EXHIBIT INDEX</B></FONT></P>
<P id=PARA206 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>&nbsp;</B></FONT></P>
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<P id=PARA207 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Exhibit No.</FONT></P></TD>
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<P id=PARA208 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Description</FONT></P></TD></TR>
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<P id=PARA209 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">10.1</FONT></P></TD>
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<P id=PARA210 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Securities Purchase Agreement</FONT></P></TD></TR>
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<P id=PARA211 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">10.2</FONT></P></TD>
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<P id=PARA212 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Form of Senior Secured Convertible Note to be issued by the Company</FONT></P></TD></TR>
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<TD style="BORDER-RIGHT: #000000 1px solid; WIDTH: 18%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA213 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">10.3</FONT></P></TD>
<TD style="WIDTH: 82%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA214 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Form of Investor Note to be issued by the Investor</FONT></P></TD></TR>
<TR>
<TD style="BORDER-RIGHT: #000000 1px solid; WIDTH: 18%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA215 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">10.4</FONT></P></TD>
<TD style="WIDTH: 82%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA216 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Form of Registration Rights Agreement</FONT></P></TD></TR>
<TR>
<TD style="BORDER-RIGHT: #000000 1px solid; WIDTH: 18%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA217 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">10.5</FONT></P></TD>
<TD style="WIDTH: 82%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA218 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Form of Security and Pledge Agreement </FONT></P></TD></TR>
<TR>
<TD style="BORDER-RIGHT: #000000 1px solid; WIDTH: 18%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA219 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">10.6</FONT></P></TD>
<TD style="WIDTH: 82%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA220 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Form of Guaranty</FONT></P></TD></TR>
<TR>
<TD style="BORDER-RIGHT: #000000 1px solid; WIDTH: 18%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA221 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">10.7</FONT></P></TD>
<TD style="WIDTH: 82%; VERTICAL-ALIGN: top; BORDER-BOTTOM: #000000 1px solid">
<P id=PARA222 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Form of Voting and Lockup Agreement</FONT></P></TD></TR>
<TR>
<TD style="BORDER-RIGHT: #000000 1px solid; WIDTH: 18%; VERTICAL-ALIGN: top">
<P id=PARA223 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">10.8</FONT></P></TD>
<TD style="WIDTH: 82%; VERTICAL-ALIGN: top">
<P id=PARA224 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Letter Agreement</FONT></P></TD></TR></TABLE>
<P id=PARA226 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>&nbsp;</B></FONT><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman"></FONT></P>
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<P id=PARA230 style="TEXT-ALIGN: center; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif"><B>SIGNATURE</B></FONT></P>
<P id=PARA231 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
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<P id=PARA233 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">&nbsp;</FONT></P>
<P id=PARA234 style="TEXT-ALIGN: left; MARGIN: 0pt; LINE-HEIGHT: 1.25"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman, Times, serif">Dated: December 2, 2016</FONT></P>
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<P id=PARA248.2 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">HELIOS AND MATHESON ANALYTICS INC.</FONT></P></TD>
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<P id=PARA248.13 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">By: </FONT></P></TD>
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<P id=PARA248.14 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">/s/ Parthasarathy Krishnan</FONT></P></TD>
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<P id=PARA248.18 style="MARGIN-BOTTOM: 0px; MARGIN-TOP: 0px"><FONT style="FONT-SIZE: 10pt; FONT-FAMILY: Times New Roman">Parthasarathy Krishnan, Chief Executive Officer</FONT></P></TD>
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hmny20161201_8k.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 1, 2016
HELIOS AND MATHESON ANALYTICS INC.
(Exact name of Registrant as specified in charter)
Delaware
(State or other jurisdiction
of incorporation)
0-22945
(Commission File Number)
13-3169913
(IRS Employer
Identification Number)
Empire State Building
350 5
th
Avenue
New York, New York 10118
(Address of principal executive offices)
Registrant's telephone number, including area code:
(212) 979-8228
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions (see General Instruction A.2 below).
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR240.14a-12)
☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)).
☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13(e)-4(c))
Item 1.01.     Entry Into a Material Definitive Agreement.
Sale of Senior Secured Convertible Notes
The following does not purport to be a complete description of the Securities Purchase Agreement, the Senior Secured Convertible Notes, the Investor Note, the Registration Rights Agreement, the Security and Pledge Agreement, the Guaranty, the Voting and Lockup Agreement and the Placement Agent Warrant described in this Current Report and each is qualified in its entirety by reference to the full text of such document. Such documents are attached as exhibits to this Current Report and are incorporated herein by reference.
Capitalized terms used in the discussion below but not defined are defined in the form of the Senior Secured Convertible Note attached as Exhibit 10.2 to this Current Report.
Securities Purchase Agreement
On December 1, 2016, pursuant to a Securities Purchase Agreement ("SPA") entered into by Helios and Matheson Analytics Inc. (the "Company"), an institutional investor (the "Investor") and Palladium Capital Advisors LLC ("Palladium"), the Company agreed to sell and issue two Senior Secured Convertible Notes to the Investor in the aggregate principal amount of $6,720,000 (each, a "Note" and collectively, the "Notes") for consideration consisting of (i) a cash payment by the Investor in the amount of $1,100,000 and (ii) a secured promissory note payable by the Investor to the Company (the "Investor Note") in the principal amount of $4,900,000 (the "Purchase Price Balance") (collectively, the "Note Financing"). The Note in the aggregate original principal amount of $1,820,000 is referred to as the "Initial Note". The Note in the aggregate original principal amount of $4,900,000 is referred to as the "Additional Note". The Note Financing was made pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506(b) promulgated thereunder. The Company will use all the proceeds from the sale of the Notes for general corporate purposes.
If
the Company proposes to undertake a subsequent offering of its securities, subject to certain customarily exempt securities (a "Subsequent Placement"), at any time on or prior to the later of (x) the date the Notes held by the Investor are no longer outstanding and (y) the second anniversary of the closing date of the SPA (the "Closing Date")
, the Investor will have the right to subscribe for up to 50% of the securities offered.
As required by the SPA, the Company obtained the written consent of the holders of a majority of its common stock approving the Note Financing and the potential issuance of more than 20% of the Company's issued and outstanding common stock in connection with the Note Financing, in accordance with Nasdaq Listing Rule 5635.
The Company is also required to file with the Securities and Exchange Commission, no later than January 16, 2016, and mail to its other stockholders, a definitive information statement in compliance with Rule 14c-2 promulgated under the Securities Exchange Act of 1934, as amended.
The SPA requires the Company to reimburse the Investor for all reasonable costs and expenses incurred by the Investor or its affiliates in connection with the structuring, documentation, negotiation and closing of the Note Financing.
Investor Note
The Investor Note will be payable in full eight months from the Closing Date. The Investor's obligation to pay the Company the Purchase Price Balance pursuant to the Investor Note is to be secured by $4.9 million, in the aggregate, in cash, cash equivalents, any Group of Ten ("G10") currency and any notes or other securities issued by any G10 country. The Company will receive that portion of the Purchase Price Balance then due upon each voluntary or mandatory prepayment of the Investor Note. On or after December 31, 2016 (or earlier if the Company permits), the Investor may, at its option and at any time, voluntarily prepay the Investor Note, in whole or in part. The Investor Note is also subject to mandatory prepayment, in whole or in part, upon the occurrence of one or more of the following mandatory prepayment events:
(1) Mandatory Prepayment upon Conversion of Initial Note – At any time the Investor has converted $1,820,000 or more in principal amount of the Initial Note, the Investor will be required to prepay the Investor Note, on a dollar-for-dollar basis, for each subsequent conversion of the Additional Note.
(2) Mandatory Prepayment upon Mandatory Prepayment Notices – The Company may require the Investor to prepay the Investor Note by delivering a mandatory prepayment notice to the Investor, subject to (i) the satisfaction of certain equity conditions, and (ii) the Investor's receipt of a valid written notice by the Company electing to effect a mandatory conversion of Restricted Principal (defined as $4.9 million of the principal amount of the Notes), not in excess of the Maximum Mandatory Share Amount or the Maximum Mandatory Conversion Amount (each as defined below under the heading
Conversion of the Notes
).
The Investor Note also contains certain optional offset rights of the Company and the Investor, which if exercised, would reduce the amount outstanding under the Note and the Investor Note by the same amount and, accordingly, the cash proceeds received by the Company from the Investor pursuant to the Note Financing.
Placement Agent Warrant
On the Closing Date, the Company will issue a 5-year warrant (the "Placement Agent Warrant") to Palladium as partial payment for its placement agent services. The Placement Agent Warrant allows Palladium to purchase 22,000 shares (the "Warrant Shares") of the Company's common stock at an exercise price per share equal to the greater of $4.45 and the closing bid price of the Company's Common Stock on the Nasdaq Capital Market on the Closing Date. If, after the first anniversary of the Closing Date, there is no effective registration statement registering, or no current prospectus available for, the resale of the Warrant Shares by Palladium, then the Placement Agent Warrant may also be exercised, in whole or in part, by means of a "cashless exercise". The Placement Agent Warrant may not be exercised if, after giving effect to the exercise Palladium, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of the Company's common stock outstanding immediately after giving effect to the issuance of the Warrant Shares. Upon not less than 61 days' prior notice to the Company, Palladium may increase or decrease the ownership limitation, provided that the ownership limitation in no event exceeds 9.99% of the number of shares of the Company's common stock outstanding immediately after giving effect to the issuance of the Warrant Shares.
The Notes
Principal Amount
The aggregate principal amount of the Notes is $6,720,000.
Maturity Date
Unless earlier converted or redeemed, the Notes mature 8 months from the Closing Date.
Interest and Payment of Interest
The Notes bear interest at a rate of 6% per annum, subject to an increase to 12% during the first 30 days following the occurrence and continuance of an Event of Default and to 18% thereafter. Interest on the Notes will be payable in arrears commencing on January 1, 2017 and quarterly thereafter, beginning on April 1, 2017 and, so long as the Equity Conditions have been satisfied, may be paid in shares of common stock at the Company's option. The Company may also elect to pay interest in whole or in part in cash. Interest on the Notes is computed on the basis of a 360-day year and twelve 30-day months.
Conversion of the Note
The Investor may, at any time, elect to convert the 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 $4.45.
The Investor also has the right to convert the Notes into shares of the Company's common stock at the Alternate Conversion Price, subject to certain beneficial ownership limitations described below. The Alternate Conversion Price is defined as the lowest of (i) the Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, (ii) $4.00 for the Initial Note (subject to proportionate adjustment for stock splits, dividends and combinations), and (iii) the greater of (I) the Floor Price ($4.00) 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 five consecutive Trading Days ending and including the Trading Day immediately preceding the delivery or deemed delivery of the applicable conversion notice, divided by (y) 5, for the Additional Note
.
If the Equity Conditions are satisfied, the Company may require the holders of the Notes to convert all or any part of the Notes, up to the Maximum Mandatory Share Amount and the Maximum Mandatory Conversion Amount (each, a "Mandatory Conversion"). If on the fifth Trading Day immediately following a Mandatory Conversion Date and on each fifth Trading Day thereafter through and including the fifteenth Trading Day immediately following such Mandatory Conversion Date (each, a "True-Up Date") the True-Up Price is less than the applicable Mandatory Conversion Price, the Company must deliver to the holders of the Notes an additional number of shares of common stock equal to the difference between the number of shares of common stock delivered to the holders as a result of the Mandatory Conversion and the number of shares determined by dividing the principal, interest and late charges converted by the True-Up Price. The "True-Up Price" is defined as 85% of the lowest volume weighted average price of the Company's common stock on the Trading Day with the lowest volume weighted average price during the 15 consecutive Trading Days following the Mandatory Conversion.
"Mandatory Conversion Date" means the third Trading Day following the delivery by the Company of a Mandatory Conversion Notice.
"Mandatory Conversion Price" means, with respect to any Mandatory Conversion that price which shall be the lowest of (i) the Conversion Price as in effect on the applicable Mandatory Conversion Date, (ii) 80% the sum of (A) the volume weighted average price of the Company's common stock for each of the 3 Trading Days with the lowest volume weighted average price of the Company's common stock during the 20 consecutive Trading Day period ending on and including the Trading Day immediately prior to the applicable Mandatory Conversion Date by (B) 3.
"Maximum Mandatory Share Amount" with respect to any Mandatory Conversion Date means 100% of the quotient of (x) the sum of the composite aggregate daily share trading volume of the Company's common stock for each Trading Day during the 5 Trading Day period ending and including the Trading Day immediately prior to the applicable Mandatory Conversion Notice Date, divided by (y) 5.
"Maximum Mandatory Conversion Amount" with respect to any Mandatory Conversion Date means the difference of (x) $500,000 less (y) the sum of each Conversion Amount converted under the applicable Note during the 5 Trading Day period ending and including the applicable Mandatory Conversion Date.
Beneficial Ownership Limitations on Conversion and Issuance
In addition to the conversion limitations described above, the Notes may not be converted and shares of the Company's common stock may not be issued under the Notes if, after giving effect to the conversion or issuance, the applicable holder of a Note together with its affiliates would beneficially own in excess of 9.99% of the Company's outstanding shares of common stock. At the Investor's option, the ownership limitation blocker may be raised or lowered to any other percentage not in excess of 9.99%, as applicable, except that any raise will only be effective upon 61-days' prior notice to the Company.
Redemption of the Note
Provided there has been no Equity Conditions Failure, the Company has the right to redeem all, but not less than all, of the amounts remaining unpaid under the Notes. The portion of the Notes subject to redemption can be redeemed by the Company in cash at a price equal to 115% of the amount being redeemed. In the event of a Change of Control, the Investor may require the Company to redeem the Notes in cash at the Change of Control Redemption Price (as defined in the Note).
Events of Default
The Notes contain standard and customary Events of Default including but not limited to: (i) failure to register the Company's common stock within certain time periods or failure to keep the registration statement effective as required by the Registration Rights Agreement; (ii) failure to maintain the listing of the Company's common stock; (iii) failure to make payments when due under the Notes; (iv) breaches of covenants and (iv) bankruptcy or insolvency.
Following an Event of Default, the Investor may require the Company to redeem all or any portion of the Notes. The redemption amount may be paid in cash or with shares of the Company's common stock, at the election of the Investor, at a price equal to the Event of Default Redemption Price.
The Company must immediately redeem the Notes in cash upon the occurrence of a Bankruptcy Event of Default.
The Event of Default Redemption Price will be computed as a price equal to the greater of (i) 125% of the principal, interest and late charges to be redeemed and (ii) the product of (X) the principal, interest and late charges to be redeemed divided by the Conversion Price multiplied by (Y) the product of (1) 125% multiplied by (2) the greatest Closing Sale Price of the Company's common stock on any Trading Day during the period commencing on the date preceding such Event of Default and ending on the date the Company makes the entire payment required to be made under the Note.
In addition, following an Event of Default, the holders of the Notes will have the right to convert the Notes at the "Alternate Conversion Event of Default Price" which means, with respect to any Alternate Conversion, that price which shall be the lowest of (i) the Conversion Price as in effect on the applicable Conversion Date of the applicable Alternate Conversion, and (ii) 75% of the lowest volume weighted average price of the Company's common stock for each of the 30 consecutive Trading Days ending and including the Trading Day of delivery or deemed delivery of the applicable Conversion Notice.
Fundamental Transactions
The Notes prohibit the Company from entering into specified transactions involving a change of control unless the successor entity, which must be a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market, assumes in writing all of the Company's obligations under the Notes.
New Debt
With the exception of Permitted Indebtedness the Company has agreed that for a period of 90 days following payment in full of the Notes, it will not incur any other debt.
Security and Pledge Agreements and Guaranty
On the Closing Date, the Company and its wholly-owned subsidiaries Zone Technologies, Inc. ("Zone") and HMNY Zone Loan LLC will each enter into a Security and Pledge Agreement in favor of the Investor as Collateral Agent. Pursuant to such Security and Pledge Agreements, the Notes will be secured by a perfected first priority security interest in all of the assets of the Company, Zone and HMNY Zone Loan LLC, subject to Permitted Liens.
Zone and HMNY Zone Loan LLC will also provide a Guaranty to the Investor as Collateral Agent whereby they guarantee the punctual payment of all obligations that accrue after the commencement of any insolvency proceeding of the Company, whether or not the payment of such obligations are enforceable or allowable in the insolvency proceeding, and all fees, interest, premiums, penalties, causes of actions, costs, commissions, expense reimbursements, indemnifications and all other amounts due or to become due under any of the Note Financing documents, and agrees to pay any and all costs and expenses (including counsel fees and expenses) incurred by the Collateral Agent in enforcing any rights under the Guaranty or any other Note Financing document.
Registration Rights Agreement
Under the terms of a Registration Rights Agreement to be entered into with the Investor on the Closing Date, the Company will be required to register for resale the shares of common stock that are issuable upon conversion of the Notes, additional shares that could be used as payment of monthly interest plus an additional number of shares so that the total number of shares of common stock registered equals 125% of the sum of the maximum number of shares issuable upon conversion of the Notes. The Registration Rights Agreement requires the Company to file the registration statement within 30 days after the Closing Date and to have the registration statement declared effective 90 days after the Closing Date (or 120 days after the Closing Date if the registration statement is subject to review by the Securities and Exchange Commission).
The Registration Rights Agreement provides for the payment of liquidated damages of one and one-half percent (1.5%) of the product of (x) the number of shares of common stock required by the Registration Rights Agreement to be included in the registration statement and (y) the Closing Sale Price as of the Trading Day immediately prior to the date a Registration Delay Payment, defined as the failure to file the registration statement in the time required, the failure to have the registration statement declared effective in the time required, the failure to maintain the effectiveness of the registration statement or the failure to keep current public information in the marketplace.
The Company is required to keep the registration statement effective (and the prospectus contained therein available for use) pursuant to Rule 415 for resales on a delayed or continuous basis at then-prevailing market prices at all times until the earlier of (i) the date as of which the holders of the Notes may sell all of the common stock issuable pursuant thereto without restriction pursuant to Rule 144 or (ii) the date on which all of the common stock covered by the registration statement shall have been sold.
Voting and Lockup Agreement
As a condition to closing the Note Financing, Theodore Farnsworth, the Chairman of the Board of the Company and Chief Executive Officer of Zone, 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. (collectively, the "Majority Stockholders"), who collectively own approximately 74% of the Company's issued and outstanding common stock, will be required to execute a Voting and Lockup Agreement with the Company. Pursuant to the Voting and Lockup Agreement, the Majority Stockholders will agree to vote in favor of the Company's issuance of the Notes and the common stock into which the Notes can be converted. The Voting and Lockup Agreement also requires that, for a period beginning on the Closing Date and ending on the date when all of the principal outstanding under the Note issued to the Investor consists of Restricted Principal thereunder, they will not (i) dispose of or agree to dispose of, directly or indirectly, any securities of the Company, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any securities of the Company owned directly by the Majority Stockholders (including holding as a custodian) or (iii) permit to exist any security interest, lien, claim, pledge, option, right of first refusal, agreement, or limitation on the Majority Stockholders' voting rights, charge or other encumbrance of any nature with respect to the Majority Stockholders' securities in the Company or (iv) engage in any hedging or other transaction which is designed to or which reasonably could be expected to lead to or result in a sale or disposition of the Majority Stockholders' securities in the Company or (v) directly or indirectly initiate, solicit or encourage any person to take actions which could reasonably be expected to lead to the occurrence of any of the foregoing.
Letter Agreement Under September 2016 Convertible Notes
In a Current Report on Form 8-K filed by the Company on September 8, 2016, the Company reported that it issued Senior Secured Convertible Notes dated September 7, 2016 (the "September Convertible Notes") to the Investor in the form attached as an exhibit to such Current Report (the "Original 8-K"), for consideration consisting of a cash payment to the Company in the amount of $1,000,000 and a promissory note to the Company in the amount of $3,000,000 (the "September Investor Note"). The Original 8-K is incorporated by reference in this Current Report.
On December 1, 2016, pursuant to Section 7(e) of the September Convertible Notes, the Company executed a written notice to the Investor, in the form attached as an exhibit to this Current Report (the "Letter Agreement"), that the Company desires the Investor's consent to permanently lower the Conversion Price (as defined in the September Convertible Notes) to $4.00 (as adjusted for stock splits, stock dividends, stock combinations, recapitalizations and similar events) (the "Conversion Price Reduction"), effective upon the Investor's voluntary prepayment to the Company of the remaining $900,000 principal balance of the September Investor Note in one lump sum (the "Investor Prepayment"), which the Company expects to occur on December 2, 2016.. The Investor consented to the Conversion Price Reduction.
The Letter Agreement also provides that if any of the September Convertible Notes remain outstanding as of January 15, 2017, the Company shall irrevocably deliver either a Mandatory Conversion Notice or a Company Optional Redemption Notice (each as defined under the September Convertible Notes), at the Company's option, to each holder of the September Convertible Notes then outstanding (with a request to waive any Equity Conditions Failure (as defined under the September Convertible Notes)) with respect to the remaining $980,000 in principal amount of the September Convertible Notes plus interest thereon and any other amounts then outstanding under the September Convertible Notes. In the event the Company elects to deliver a Mandatory Conversion Notice, the conversion price will be equal to the Mandatory Conversion Price (as defined in the September Convertible Notes, which is the same definition provided above under the heading
Conversion of the Note)
. In the event the Company elects to deliver a Company Optional Redemption Notice, the redemption price will be equal to 110% of the amount being redeemed, (i) payable in cash in the case of the September Convertible Note with a principal outstanding balance of $900,000 held by the Investor and, (ii) in the case of the September Convertible Note held by Palladium in the principal amount of $80,000 (the "Palladium Note"), at the Company's election, payable in cash or by exchange of the Palladium Note for an unsecured note in the same amount and otherwise in substantially the same form as the Palladium Note.
Item 2.03     Creation of a Direct Financial Obligation or an Obligation under an Off-Balance
Sheet Arrangement of a Registrant.
The information included in Item 1.01 of this Current Report is hereby incorporated by reference into this Item 2.03.
Item 3.02.     Unregistered Sales of Equity Securities.
The information included in Item 1.01 of this Current Report is hereby incorporated by reference into this Item 3.02.
In addition to issuing the Placement Agent Warrant to Palladium, the Company agreed to pay 8% of the cash proceeds actually received from the Note Financing to Palladium as a placement agent commission. The Company will pay an aggregate cash amount of $88,000 to Palladium as of the Closing Date.
Item 5.07     Submission of Matters to a Vote of Security Holders.
On December 1, 2016, Theodore Farnsworth, the Chairman of the Board of the Company and Chief Executive Officer of Zone,
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., the owners of 1,740,000 shares, 857,149 shares and 885,891 shares, respectively, of the Company's 4,729,367 shares of common stock issued and outstanding, executed a written consent approving (i) the Note Financing and (ii) the issuance of the Notes and the Palladium Warrant to Palladium in payment for its fees, and the potential issuance of more than 20% of the issued and outstanding shares of common stock of the Company pursuant to the conversion features of the Notes, in accordance with Nasdaq Listing Rule 5635.
Item 9.01.     Financial Statements and Exhibits.
See the Exhibit Index set forth below for a list of exhibits included with this Current Report.
EXHIBIT INDEX
Exhibit No.
Description
10.1
Securities Purchase Agreement
10.2
Form of Senior Secured Convertible Note to be issued by the Company
10.3
Form of Investor Note to be issued by the Investor
10.4
Form of Registration Rights Agreement
10.5
Form of Security and Pledge Agreement
10.6
Form of Guaranty
10.7
Form of Voting and Lockup Agreement
10.8
Letter Agreement
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
Dated: December 2, 2016
HELIOS AND MATHESON ANALYTICS INC.
By:
/s/ Parthasarathy Krishnan
Parthasarathy Krishnan, Chief Executive Officer