Investors seem to be balking at MoviePass' parents' plans to reverse split its stock again — and for good reason (HMNY)

MoviePass

Helios and Matheson, the parent company of MoviePass, is seeking to boost its share price through another reverse-split of its stock.
Two of the major research firms that offer investors advice on shareholder votes back the reverse-split proposal.
Even so, investors appear dubious of it.
They have good reason to oppose it — it would free the company up to issue billions of new shares of stock after it's already massively diluted shareholders.

Sometimes investors have a much better sense of what's in their best interest than the executives in charge of the companies they own or the advisors who get paid to tell them how to vote on company issues.

Such seems to be the case with the shareholders of Helios and Matheson, the beleaguered owner of MoviePass. They finally seeming to putting their collective foot down, in defiance of the company's management and even influential proxy advisors Glass Lewis and Institutional Shareholder Services.

Helios and Matheson is seeking investor approval for the second reverse-split of its stock in four months. Once a high-flier, the company's stock has been sunk under massive dilution and the huge cash outflow from MoviePass' money-losing subscription cinema ticket service and now trades at around 2 cents a share. With Helios and Matheson running the risk that its stock will be delisted by the Nasdaq market, it's hoping to reduce its share count and boost its stock price by as much as a factor of 500 to get back into compliance with listing regulations.

Investors seem to be dubious of the new reverse-split proposal

But the company seems to be having trouble getting shareholders on board.

It's not hard to find discontent among Helios and Matheson's investors. You need only check Twitter or the various online investor discussion boards.

While investors have been unhappy for months now, thanks to the company's slumping stock, their growing ire now seems to have put the reverse-split proposal in real jeopardy of failing.

MoviePass CEO Mitch Lowe and Helios and Matheson Chief Executive Ted Farnsworth. On Monday, just three days before Helios and Matheson's special shareholder meeting was due to take place and the votes on the proposal officially counted, it issued a press release and sent out a proxy statement to shareholders noting that ISS and Glass Lewis were backing its reverse-split proposal. The proxy advisors had issued their recommendations weeks earlier, so the company wasn't exactly alerting investors to breaking news. Instead, its move to tout those recommendations in the closing days before a vote is finalized is just the sort of thing corporate managers do when they're worried about losing.

Then, the very next day, Helios and Matheson took the unusual step of delaying the shareholder meeting for two weeks, explaining that it wanted to give investors "more time to consider and vote upon the proposal." A company spokeswoman declined to say whether the company postponed the meeting because it was losing the vote, but you better believe that if the early returns were going Helios and Matheson's way, the meeting would have been held right on schedule.

Executives have done a great job of destroying shareholder value

Investors have good reason to oppose the reverse-split proposal, even if doing so puts the company in greater danger of having its shares delisted. Helios and Matheson's executives have driven the company into the dirt, destroying enormous amounts of shareholder value in the process and abusing investors' trust, even to the point where the company is now reportedly facing an investigation by New York's attorney general. Passing the proposal as written would give CEO Ted Farnsworth and his team leeway to do yet more damage.

Under the proposal, Helios and Matheson would essentially trade investors one new share of stock in the company for anywhere from two to 500 of its current shares. The move would affect the number of shares it has outstanding, the number of shares it has to set aside to pay off convertible notes, and the number of stock options it has outstanding. It would also immediately increase the company's stock price in inverse proportion to the reverse-split ratio.

What the proposal wouldn't do, though, is reduce the number of shares the company is authorized to issue. That amount would remain at 5 billion. So, one of the effects of the reverse-split would be to give the company lots more room to issue new shares.

Farnsworth and company have repeatedly taken advantage of just that latitude. In the last year, thanks in part to two shareholder-approved increases in Helios and Matheson's share count and its first reverse split in July, which reduced its outstanding shares and gave it more head room to issue new ones, the company's share count has increased nearly 3,900,00%, adjusting for that split.

The last reverse split is a bad portent for this one

However, investors don't have to look any further back than July to get a pretty good idea of what might happen if they pass another reverse split. Helios and Matheson's leaders offered some of the same rationale for that split as this one — that it was needed to boost the company's stock price to avert it being delisted from the Nasdaq. As with the current proposal, the company offered a range of ratios by which it might reverse split the stock, in that case from 1 to 2 on up to 1 to 250.

But at the shareholder meeting, Farnsworth tried to downplay the import of the reverse-split proposal, saying it was simply an "insurance policy" in case shareholders chose not to increase its share count. Either way, the company would get increased headroom to issue new shares.

After investors passed both proposals, Helios and Matheson took advantage of each of them. It reverse split its stock by 250-to-1, the maximum authorized by investors, freeing up as many shares as it could under that proposal. And then it proceeded in the coming weeks to sell shares like there was no tomorrow.

In just a week, the company's share count had already quadrupled. Two weeks later it was 100 times larger. By the middle of last month it had more than doubled again. Adding that increase to the billions of shares it had to set aside for its convertible notes, Helios and Matheson soon got to the point where it had more than maxed out the 5 billion shares it was authorized to issue. (The company has since renegotiated the terms of some of those notes, reducing the number of shares it needed to reserve.)

As you might imagine, with all that share issuance, the company's stock price plummeted. After trading at $22.50 a share immediately after the reverse split, it fell to below a $1 a share again within a week and was down below 10 cents a share within two weeks. It's been mired around 2 cents for weeks now. Thanks to that decline, the company not only doesn't meet the Nasdaq's per-share price requirements, it now falls shy of its market capitalization standards, meaning that even if the reverse-split boosts its stock price, it could still be delisted because it's not worth very much.

Thanks to all of its stock sales and debt issuance, Helios and Matheson raised some $210 million in just the first six months of this year. In that same period, its operations — which largely involved paying retail prices for millions of movie tickets that it gave away for free to customers — blew through $219 million.

The company looks set to do it all over again

The new reverse-split proposal would set Helios and Matheson up to do the same thing all over again. It already has authorization via regulatory filings to sell more shares. The split would give it billions of new shares it could issue to raise yet more funds that it can burn through, with few restrictions on management.

Both ISS and Glass Lewis declined to comment on their recommendations. Their reports on the issue were each terse. Neither proxy advisor seemed to take very seriously the previous dilution that Helios and Matheson has already inflicted on shareholders or how the proposal would give the company room to afflict them with still more.

But all indications are that investors are taking that prospect a lot more seriously than the proxy advisors and company executives. As well they should.