Helios and Matheson issued new shares before paying off emergency loan

MoviePass
CEO Mitch Lowe and Helios and Matheson Chief Executive Ted
Farnsworth in happier times.
MoviePass/Reuters

• MoviePass’ parent company appears to have turned to an
  old tactic to pay off an emergency cash advance it took out
  last Friday — issuing new shares.
• The company’s share count has nearly quadrupled just
  since it executed a reverse stock split last week.
• The move is a familiar one for the company; it
  increased its share count by 3,000% over the previous year to
  help fund ongoing losses.

Things were so desperate for MoviePass last week that its parent
company
had to get an emergency $5 million cash advance from its
largest shareholder to just to pay its payment processor so it
could continue to take ticket orders from customers.

But by Tuesday, Helios and Matheson, MoviePass’ corporate parent,
was flush enough to completely pay not just the cash advance, but
the entire $6.2 million note from the creditor.

It’s not entirely clear how Helios and Matheson was able to turn
its fortunes around in less than a week, and company officials
did not respond to a request for comment. But the company’s
recent filings with the Securities and Exchanges Commission
indicate it returned to an old tactic — issuing new shares of its
stock.

While that move may have saved the company for now, it also
likely played a role in the dramatic — and possibly terminal —
decline in Helios and Matheson’s stock price over the last week.

Helios and Matheson had to get and emergency cash advance

Last week, to prevent Helios and Matheson’s stock from being
delisted by the Nasdaq, company shareholders approved a reversed
split of its shares. The next day, July 24, the company executed
a 250-1 reverse split. The move left the company with about 1.7
million shares outstanding.

Helios and Matheson had its outage with its payment processor
that prompted its demand for a cash advance from Hudson Bay
Capital Management just three days later. That the company was
running low on cash wasn’t much of a surprise. On July 10, the
company warned it had just $13.7 million in cash on hand at the
end of June and another $32 million on deposit with its payment
processor, but was burning through cash at a rate of about $45
million a month.

What was somewhat of a surprise is that days later, on July 31,
Helios and Matheson repaid its creditor in full. But that
announcement gave a strong indication of how it did so. Along
with disclosing the payment, Helios and Matheson said its share
count had swelled by 5 million shares to 6.7 million in the just
the week since its reverse split.

That may not sound like a lot, but it means that the company
nearly quadrupled its share count in that time period. If the
company hadn’t executed its reverse split, it would have been the
equivalent of issuing 1.25 billion shares in the course of a
week.

Helios and Matheson seems to have issued new shares to pay off
its loan

Company officials didn’t respond to requests to confirm that
Helios and Matheson paid off its loan by issuing new shares. But
its filings strongly indicate that’s exactly what it did, in one
of two fashions.

In the document in which Helios and Matheson announced its demand
for a cash advance from Hudson Bay, it laid out the idea that it
might sell new shares on the open market to repay the loan.

“All proceeds received by the company on or after July 31, 2018
from sales of common stock under its outstanding at-the-market
offering … must be applied against any initial principal until
no initial principal remains outstanding, and thereafter, against
any remaining amounts due under the demand note,” the terms of
the contract stated.

But the company also laid out the possibility that it might issue
shares directly to Hudson Bay in lieu off cash to pay off the
debt.

“With the agreement of the [Hudson Bay], principal and accrued
and unpaid late charges on the demand note may be applied to all,
or any part, of the purchase price of securities to be issued
upon the consummation, after July 27, 2018, of an offering of
securities by the company to the holder.”

In its filing announcing that it had paid off the loan, Helios
and Matheson didn’t say whether it did so in cash or by issuing
shares to Hudson Bay.

The company has a history of using that tactic

The tactic of issuing new shares to raise funds is one the
company has returned to again and again as losses swelled at
MoviePass. Even before the stock split, its
share count had swelled by more than 3,000% over the previous
year.

Regardless of the approach it took to pay off its cash advance,
the result was that the company’s outstanding share count surged
yet again. And, thanks to the law of supply and demand, that
likely had a negative effect on Helios and Matheson’s share
price.

The company’s stock closed regular trading on July 26 at $6.83 a
share. On July 27, amid news of the outage and the emergency cash
advance, it dropped to $2 a share. Since then it’s fallen even
farther, closing at 10 cents a share on Thursday — and putting it
once again in danger of being delisted by the Nasdaq for failing
to trade above $1 a share.

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