Be warned, MoviePass investors: your shares may soon be worth even less than they are now — at least in terms of the portion of the company they represent.
Even after increasing its share count recently by more than 9,400% in the space of just two weeks, MoviePass’ parent company could still issue and sell hundreds of millions — even billions — of additional shares under authorizations it already has on file with the Securities and Exchange Commission, according to experts in securities laws and regulations. And investors may not know just how many more shares it’s dumped on the market until weeks after the fact.
“As long as you disclose it, you can do it,” said Seth Taube, the head of the securities practice at law firm Baker Botts. “They’ve told the world that they’ve authorized all these shares. That’s all that’s required.”
In January, Helios and Matheson, MoviePass’ parents company, filed what’s known as an S-3 document with the Securities and Exchange Commission, advising shareholders it planned to issue shares collectively worth as much as $400 million. It followed that up with a related filing in April, informing shareholders that, under that previous authorization, it planned to sell as much as $150 million worth of shares “at the market,” meaning it would sell them over time on the open market to everyday investors.
Then in July, the company filed another S-3, which gave it authorization to issue shares totaling as much as $1.2 billion — in addition to the ones it already had authorization to issue. Later that month, Helios and Matheson’s shareholders gave their stamp of approval for the company to increase its share count to as many as 5 billion shares.
Investors gave Helios and Matheson approval to issue 5 billion shares
At the same time that they approved that increase, investors also approved a plan for the company to reverse-split its stock and dramatically decrease the number of shares it had outstanding. The company immediately took advantage of that authorization and gave investors one new share of its stock for every 250 shares they held previously.
But that reverse split didn’t affect the number of shares Helios and Matheson could issue under the plan approved by shareholders. Even though the reverse split decreased the number of shares the company had outstanding from several hundred million to just 1.7 million, it could still issue up to 5 billion shares total. Indeed, the effect of the two measures approved by shareholders allowed Helios and Matheson to issue hundreds of millions more shares than it could have issued otherwise.
It certainly pushes the edge of the envelope.
Through August 9, Helios and Matheson had made at-the-market sales under its April filing totaling an estimated $107 million worth of stock, based on figures the company released in its quarterly report last week. That means that just under that authorization alone, it could raise up to about $43 million more by selling additional shares. To raise that much money at its current share price — 3 cents a share — Helios and Matheson would have to sell 1.4 billion shares of stock.
If it did that, it would more than triple its current share count of 637 million shares.
But that understates just how many shares the company is already authorized to sell. The April filing only covered a portion of the $400 million worth of shares that were authorized to be issued under the February S-3. Although the company has already issued other shares under that document, it still appears to have room to sell as much as $115 million worth of stock within the S-3’s authority, above and beyond what it can sell under the April filing.
At current stock prices, that would imply the issuance of some 3.8 billion more shares.
In other words, just under the authority of the S-3 it issued back in January, Helios and Matheson could max out the 5 billion total shares investors permitted it to issue just last month, assuming its stock price remains around the same or falls even farther. That’s not a bad bet if the company does indeed flood the market with new shares.
The company could also sell the shares in relatively short order — and without giving investors any additional warning. That’s what happened earlier this month, when Helios and Matheson increased its share count by some 630 million shares in less than two weeks. The company didn’t disclose that its share count had increased that much until after it had issued all those new shares.
As long as the company has already disclosed that it might issue and sell new shares, it doesn’t have any duty to alert investors in real time that it is in fact issuing and selling those shares, said Robert Bartlett, a professor of law at the University of California, Berkeley’s School of Law who focuses on corporate finance and securities regulation.
“There’s no duty to inform [investors] just because the [share] numbers are ticking up,” Bartlett said. “There’s no duty to update” investors.
The company has already massively diluted shareholders
The company has given every indication that that’s indeed its plan. It’s repeatedly issued new shares to raise cash to fund the ongoing losses at MoviePass. The 9,400% increase in share count from the end of July to last week came on top of previous massive dilution. Between August last year and this July, Helios and Matheson had increased its share count by 3,400%. Then, just days after its reverse split, the company issued enough shares to nearly quadruple its now-reduced share count, apparently to pay off an emergency loan.
Thanks to that dilution, and the company’s ongoing losses, some shareholders have seen the value of their Helios and Matheson shares fall by more than 99%.
That dilution was “amazing,” but perfectly legal under securities law, because it had given investors a heads-up through its disclosures that it might do it, Taube said.
“It certainly pushes the edge of the envelope, but is not beyond the pale,” he said.
Company representatives did not respond to repeated emails seeking comment about the dilution and whether the company plans to continue issuing more stock.
Helios and Matheson burned through about $50 million a month in cash in the second quarter, leaving it with just $51 million in cash and accounts payable as of August 9. Ted Farnsworth, Helios and Matheson’s CEO, told Fox Business on Wednesday that the company has cut its burn rate to $12 million a month, but that would still leave it with less than five months worth of cash, making it likely it will need to raise new funds.
Helios and Matheson’s ability to sell shares may be ending
However, its traditional tactic of issuing new shares to raise money may soon come to an end.
The company got a delisting warning in June from the Nasdaq national market after its stock fell below $1 a share. Were it to be removed from the Nasdaq, which could happen as soon as December, the company would likely have problems selling new shares.
At some point, people will stop buying.
Meanwhile, the 5 billion share limit that shareholders just put in place could put a check on MoviePass’s stock sales sooner than that. Thanks to that cap — and Helios and Matheson’s current share price — it doesn’t really have the ability to tap into the authority it got under the S-3 it filed last month. To raise the $1.2 billion allowed under that filing, it would have to sell some 40 billion shares at its current stock price. That’s far beyond what it’s now authorized to issue.
But there is an even bigger potential roadblock for Helios — investor demand.
“At some point, people will stop buying,” Bartlett said. “That’s probably the biggest limit right now.”