MoviePass, arguably the most successful crowdfunding effort to provide free money to movie fans, is continuing to hemorrhage cash while parent company Helios and Matheson (NASDAQ:HMNY) is funding those losses by relieving investors of their cash. Helios and Matheson has been selling convertible debt and the resulting share dilution has decimated its share price. Helios and Matheson which briefly hit $38/share nine months ago, has been clobbered since then, and is down another $0.03 today to $0.22/share. The continuing share dilution doesn’t appear to be anywhere near finished.
MoviePass itself is a great deal for consumers who can watch virtually an unlimited number of movies at theaters for around $10/month. In past years, MoviePass charged much higher prices and catered to heavy users but consistently couldn’t make a profit. Now with the new $10/month price point which MoviePass started last year, MoviePass appeals to a much wider audience and movie goers have been flocking to MoviePass in droves, pushing the paying subscriber base to over 3M subscribers…but Moviepass still loses money. It’s almost as if consumers will only go through the effort of signing up for MoviePass if they can actually save money overall by doing so. Helios and Matheson’s thesis that consumers are gullible people, who will eventually stop seeing movies but forget they’re paying for the service while providing Helios and Matheson additional sources of revenue, just isn’t paying off as a viable business model.
To fund these losses, Helios and Matheson has resorted to the aforementioned toxic financing which started last year. As I described in my article from last year entitled, “MoviePass Will Fail And Decimate Helios And Matheson’s Shareholders”, the company had sold a convertible note for $100M at that time which was convertible into Helios and Matheson shares. The conversion rate was initially at $12.08/share and had a ‘floor’ at $1.928/share which, if the share price were to drop that low, that price could be negotiated even lower.
Now after selling a few additional convertible notes earlier this year, Helios and Matheson has just issued yet another $164M note. This most recent note says the conversion price is $1.00/share. $1.00 is well above the current $0.20/share but the devil is in the details; the floor price of this latest note is $0.0624/share…which also can be adjusted even lower if mutually agreed upon by the company and the buyer of the note. Investors shouldn’t assume that the buyer of the note expects the share price to rise to over $1.00.
Also coming up is a shareholder vote to approve up to a 1-for-250 reverse split and an increase in the authorized share count to 2,000,000,000 shares. As more and more shares are issued the share price will likely continue to drop and share prices in the pennies typically won’t get as much traction. The company will need to perform reverse splits like these to keep the share price higher as long as the dilution continues. If there’s an end in sight to this toxic financing, it’s not obvious when that end will be.
One way to gauge at least a potential slowing the dilution is to look at the share volume. With a cash burn rate of maybe around $40M per month, Helios and Matheson has issue to the buyer, who has to then sell onto the market, about 10M shares (pre-reverse-split) per trading day in order to keep MoviePass’ doors open. If trading volume starts to dwindle to where it can no longer support such an influx of newly printed shares then MoviePass customers will shortly find their cards no longer work at the theaters. At that point investors who truly believe that the MoviePass business plan is workable might stop throwing their money into the wishing well. Dilution might not stop at that point and the shares could continue to drop, but the spigot pouring cash into Helios and Matheson might be throttled.
When MoviePass shuts down, Helios and Matheson will presumably stop throwing money over the wall to MoviePass and Helios and Matheson will probably have enough cash to start its next venture. However the company clearly doesn’t have any intention of working in the best interests of its shareholders so, even at that point, investors may be better of steering clear of the stock even if they believe in Helios and Matheson’s next story.
Investors haven’t been and still aren’t in a good situation with Helios and Matheson. If you’re an investor who believes in the MoviePass business model and who is averaging down, it might be a good idea to take your foot off of the accelerator. Even at $0.22 per share, there is still significant downside risk to owning Helios and Matheson stock.
Disclaimer: The author holds a Short position in HMNY. The author is not receiving compensation for this article. This article is intended for informational and entertainment use only, and should not be construed as professional investment advice.
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