Why MoviePass Stock Helios and Matheson Just Sank 29%

What happened

Shares of MoviePass majority owner Helios and Matheson (NASDAQ: HMNY) are down 29.8% in midday trading on the Nasdaq, and bouncing around a share price of $5.63 as of 11:25 a.m. EST. While Helios & Matheson made news last week with its announcement that it has signed up two million subscribers to its movie-viewing subscription service, it's news of a different sort that's sending the stock down this morning:

Helios and Matheson is selling stock. A lot of stock.

So what

Selling movie subscriptions for $7.99 a month and then turning around and paying full price -- $10 or more per ticket -- for each and every movie that each and every subscriber goes to see is a cash-consuming way to run a business. To fund its continued expansion, and to give it a chance at remaining in business long enough to turn its business viable, Helios needs to raise cash, and quick.

To raise that cash, Helios announced today that it will be selling paired groupings of Helios stock and warrants to buy even more stock in the future. The company is offering to sell:

  • 7,425,000 Series A-1 units -- each comprising a share of stock and a warrant to buy another share for $6.50 at any time in the next five years.
  • 11,675,000 Series B-1 units -- each comprising a warrant to buy a share at $5.50 at any time in the next five years.

Each "unit" will sell for $5.50. Helios is hoping to raise a total of $105 million (before deducting fees and costs) to fund its ongoing losses with the proceeds, although it may use some of the money "to increase the Company's ownership stake in MoviePass" instead.

Now what

In total, Helios and Matheson is creating the potential for up to 26.5 million new shares of its stock to flood onto the market -- and as early as the February 15 closing date for the sales. With the company only having 24 million shares of stock outstanding today, therefore, Helios and Matheson just told investors to expect more than 50% dilution of their ownership stakes in the company.

It's no surprise that the stock is going down as a result. The real surprise is that Helios and Matheson stock didn't plunge 50% or more -- yet.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.