What happened

Shares of Helios and Matheson Analytics (OTC:HMNY), best known recently as the majority owner of the MoviePass service that exploded in popularity late last year, have plunged today. The stock is down 11% as of 12 p.m. EST after the company announced it was issuing $60 million in convertible notes. Separately, MoviePass said it was partnering with iHeartMedia.

So what

The iHeartMedia announcement is mostly a marketing campaign and isn't contributing to the drop. Rather, the convertible note announcement is the likely culprit. The offering is not being sold to the public, but instead is a private placement with an institutional investor. As such, the offering is not being registered with the SEC. The bonds will be convertible at the option of the investor at a fixed conversion price of $11.44.

People watching movie at a theater

Image source: Getty Images.

Once the deal closes, the investor will pay $25 million in cash upfront along with a payable note of $35 million. That remaining $35 million can be prepaid at the discretion of the investor.

Now what

The bond offering is a little strange, as $35 million comes in the form of a payable note to be paid at a later time. The company is basically selling debt in exchange for debt, which entails some additional risk. Helios and Matheson has been aggressively raising capital to fund growth following the excitement of MoviePass' debut, which launched its $9.95-per-month plan in August. At the end of September, the company had just $1.7 million in cash and equivalents. Additionally, since the new notes are convertible into equity, current shareholders may suffer from some dilution. Helios and Matheson raised another $60 million in December through a public offering of stock and warrants.

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