I'd highly advise people to read the below several times....
In addition, if our stockholders approve the issuance of all shares issuable upon conversion of the outstanding June Notes, as of September 14, 2018, an additional 4.2 billion shares of common stock may be issuable upon conversion of the June Notes.
As of September 14, 2018, under the November Notes we had an aggregate of approximately $20.4 million in restricted principal outstanding, under the January Notes we had an aggregate of approximately $29.0 million in restricted principal outstanding, and under the June Notes we had an aggregate of approximately $74.8 million in restricted principal outstanding, for a total amount of approximately $124.2 million in restricted principal outstanding under the Notes as of such date. As of September 14, 2018, the conversion price of the November Notes and the January Notes is $0.02 and the conversion price of the June Notes is $250. The conversion price of the June Notes is not subject to downward adjustment until or unless we obtain stockholder approval of the issuance of shares under the June Notes to the extent required by Nasdaq Listing Rule 5635.
Under the Notes, we are currently required to reserve approximately 5.3 billion shares of the Company’s common stock for issuance. As a result, unless we reach an agreement with the holders of the Notes to reduce our reserve requirements under the Notes, we do not have enough authorized, unissued and unreserved shares to fulfill the current reserve requirements under the Notes or to meet the Company’s needs for future equity financing or acquisitions. Moreover, the number of shares issuable upon conversion of the Notes may increase significantly if there are further conversion price reductions resulting from the full ratchet conversion price adjustment provisions of the Notes, which provide that if we issue securities in certain transactions, such as our at-the-market offering, at a price lower than the applicable conversion price of the Notes, then the applicable conversion price of the Notes will be reduced to equal such lower price, resulting in additional shares issuable upon conversion of the Notes. As of September 14, 2018, there is no unrestricted principal outstanding under the Notes. As such, all of the approximate 5.3 billion shares that we are required to reserve under the Notes as stated above represent shares issuable upon conversion of restricted principal under the Notes for which an equivalent amount owed to us under the corresponding investor notes has not yet been paid. Such restricted principal may not, as of the date of this proxy statement, be converted into any shares of our common stock. However, to the extent holders of the Notes provide additional payments to us under the corresponding investor notes, an amount equal to such payment will become unrestricted principal under the Notes that may be converted to our common stock at the election of the holders of the Notes. The lack of adequate authorized shares of common stock available to satisfy our reserve requirements under the Notes and for future equity financings could materially limit or delay the Company’s ability to obtain capital as and when needed or consummate future acquisitions involving the payment of consideration in shares of our common stock. Effecting the Reverse Split Amendment would enable the Company to satisfy its reserve requirements under the Notes and create additional unreserved shares available for future equity financings and acquisitions.
If the Board determines to implement the Reverse Split Amendment, the Company would communicate to the public, prior to the effective time of the Reverse Split Amendment, additional details regarding the Reverse Split Amendment (including the final reverse split ratio, as determined by the Board). The Board reserves the right to elect not to proceed with the Reverse Split Amendment if it determines, in its sole discretion, that the Reverse Split Amendment is no longer in the best interests of the Company or its stockholders.
In determining which reverse split amendment to implement, if any, following receipt of stockholder approval of this Proposal 1, the Board may consider, among other things, various factors, such as:
? the historical trading price and trading volume of our common stock;
? the then-prevailing trading price and trading volume of our common stock and the expected impact of the Reverse Split on the trading market for our common stock in the short- and long-term;
? the Company’s ability to continue its listing on the Nasdaq Capital Market;
? which reverse split amendment would result in the least administrative cost to us; and
? prevailing general market and economic conditions.
The failure of stockholders to approve this Proposal 1 could prevent the Company from regaining compliance with Nasdaq’s $1.00 minimum bid price requirement (the “Minimum Bid Price Requirement”), unless the market price of our common stock increases above the Minimum Bid Price Requirement without a reverse split for at least 10 consecutive trading days (or at least 20 consecutive trading days if required by Nasdaq in its discretion) prior to December 18, 2018. If Nasdaq delists our common stock, then our common stock would likely become traded on the over the counter market maintained by OTC Markets Group Inc. (the “OTC”), which does not have the substantial corporate governance or quantitative listing requirements for continued trading that Nasdaq has. In that event, interest in our common stock may decline and certain institutions may not have the ability to trade in our common stock, all of which could have a material adverse effect on the liquidity or trading volume of our common stock. If our common stock becomes significantly less liquid due to delisting from Nasdaq, our shareholders may not have the ability to liquidate their investments in our common stock as and when desired and we believe our access to capital would become significantly diminished as a result. Also, due to certain state securities (blue sky) law requirements which apply to securities that are not listed on an exchange, our ability to consummate future public offerings would be materially limited, and could require that the Company undertake private placements on terms that are significantly less favorable than the terms of a public offering.
Reasons for the Reverse Split
To maintain our Nasdaq Listing.
On June 21, 2018, Nasdaq notified us that the bid price of our common stock had closed below the required $1.00 per share for 30 consecutive trading days, and, accordingly, that we did not comply with the Minimum Bid Price Requirement. We have been provided 180 calendar days, or until December 18, 2018, to regain compliance with the Minimum Bid Price Requirement. If we are not able to regain compliance with the Minimum Bid Price Requirement, the common stock could be delisted and trade on the over the counter market.
We believe that a reverse stock split could increase the market price of our common stock sufficient to satisfy the Minimum Bid Price Requirement in the near term, though we cannot provide any assurance that a reverse stock split will have that effect. In July 2018, we effected a 1-for-250 reverse split of our common stock (the “July 2018 Reverse Stock Split”), which had the initial effect of increasing the market price of our common stock to approximately $22.50 per share. However, in less than five trading days after the July 2018 Reverse Stock Split, the closing bid price of our common stock declined to less than $1.00, and we were not able to regain compliance with the Minimum Bid Price Requirement. As of September 13, 2018, the closing price of our common stock was $0.0218. As a result, we continue to be out of compliance with the Minimum Bid Price Requirement.
The Board has weighed the potential harm to the Company and its stockholders resulting from a Nasdaq delisting against the potential harm to the Company and its stockholders from another significant reverse stock split, including the risks described below under “Certain Risks Associated with a Reverse Split”. Although MoviePass recently has implemented significant cost cutting measures which have had an immediate and materially positive effect in reducing the Company’s monthly cash deficit, the Company believes it will continue to need to raise capital to fund MoviePass until MoviePass becomes cash flow positive or profitable (of which there is no assurance). If the Company is unable to maintain its Nasdaq listing, its access to capital will become further limited and it may not have sufficient capital to enable MoviePass to continue its operations or become cash flow positive or profitable. Therefore, the Board has concluded that the potential harm to the Company and its stockholders resulting from a Nasdaq delisting outweighs the potential harm to the Company and its stockholders from another significant reverse stock split.
To potentially improve the liquidity of our common stock.
A reverse split could allow a broader range of institutions to invest in our common stock (namely, funds that are prohibited from buying stocks whose price is below a certain threshold), potentially increasing trading volume and liquidity of our common stock and potentially decreasing the volatility of our common stock if institutions become long-term holders of our common stock. A reverse split could help increase analyst and broker interest in our common stock as their policies can discourage them from following or recommending companies with low stock prices. Because of the trading volatility often associated with low-priced stocks, many brokerage houses and institutional investors have internal policies and practices that either prohibit them from investing in low-priced stocks or tend to discourage individual brokers from recommending low-priced stocks to their customers. Some of those policies and practices may make the processing of trades in low-priced stocks economically unattractive to brokers. Additionally, because brokers’ commissions on low-priced stocks generally represent a higher percentage of the stock price than commissions on higher-priced stocks, a low average price per share of common stock can result in individual stockholders paying transaction costs representing a higher percentage of their total share value than would be the case if the share price were higher.
Certain Risks Associated with a Reverse Split
There can be no assurance that the reverse split will increase the market price of the common stock and have the desired effect of maintaining compliance with the Minimum Bid Price Requirement. The Board believes that a reverse split has the potential to increase the market price of the common stock so that the Company may be able to satisfy the Minimum Bid Price Requirement. However, the long- and near-term effect of the reverse split upon the market price of the common stock cannot be predicted with any certainty. The July 2018 Reverse Split did not enable the Company to regain compliance with the Minimum Bid Price Requirement, and the history of similar reverse stock splits for companies in like circumstances is varied, particularly since investors may view a reverse stock split negatively.
Moreover, the total market capitalization of the common stock after the reverse split may be lower than the total market capitalization before the reverse split. On the trading day immediately before the July 2018 Reverse Stock Split, our market capitalization was $37.9 million, with 421,299,736 shares of common stock outstanding. Immediately after giving effect to the July 2018 Reverse Stock Split, we had 1,750,979 shares issued and outstanding. As of the record date, our market capitalization was $[ ], notwithstanding that we had [ ] billion shares outstanding as of the record date.
To regain compliance with the Minimum Bid Price Requirement, we effected the July 2018 Reverse Stock Split of our common stock at a ratio of 1 share-for-250 shares. However, since the effectiveness of the July 2018 Reverse Stock Split, the per share market price of our common stock has fallen below $1.00 and as of September 13, 2018, the closing price of our common stock was $0.0218. As a result, we are not in compliance with the Minimum Bid Price Requirement. There can be no assurance that another reverse stock split will increase the market price of the common stock so that the Company may be able to maintain compliance with the Minimum Bid Price Requirement.
Further, following any reverse stock split, we will have additional shares available to issue upon conversion or exercise of outstanding securities of the Company that are convertible into or exercisable for common stock, including the conversion of unrestricted principal and make-whole interest under our outstanding Notes following payments by investors under investor notes payable to us. Stockholders should be aware of the extremely dilutive nature of the Notes and that additional conversions of the Notes could cause downward pressure on the price for the common stock. In addition, we will continue to require significant proceeds from sales of our debt or equity securities to fund our operations for the near future, which will cause further dilution to stockholders. The issuance of a substantial amount of shares of common stock or securities convertible into or exercisable for common stock in the future could cause downward pressure on the price of our common stock and there is no assurance that the market price for the common stock will remain at a level sufficient to satisfy the Minimum Bid Price Requirement.
Even if another reverse stock split enables us to regain compliance with the Minimum Bid Price Requirement, the Company may be delisted due to other Nasdaq listing criteria deficiencies, including the failure to maintain the minimum required market value of listed shares equal to at least $35 million and the failure to have at least three independent directors on the audit committee of the Board and a majority of independent directors on the Board. Further, the reverse split may not result in a per share price that would attract brokers and investors who do not trade in lower priced stocks.
Moreover, Nasdaq may delist our common stock if it concludes that delisting is in the public interest. For example, if we engage in further dilutive issuances of our common stock in an amount deemed unacceptable by Nasdaq, or Nasdaq concludes that such dilutive issuances in an unacceptable amount are likely to occur, Nasdaq may conclude that delisting our common stock is in the public interest. Nasdaq has the authority to delist our common stock for such public interest concerns.
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