Shares of Helios and Matheson Analytics (NASDAQOTH:HMNY) are sinking on Thursday, heading sharply lower after the company announced it would sell up to $150 million in a secondary stock offering after Wednesday's market close. Once completed, the transaction will beef up the coffers of the company that's taking some big consolidated losses with its 92% stake in MoviePass, but it will also dramatically jack up its share count. It priced $30 million of the shares in a spot secondary at $2.75 on Thursday morning.
There are good reasons for a stock slipping after an ownership dilutive deal. There are even better ones for Helios and Matheson to be going this route. Let's go over why the MoviePass controlling stakeholder is trying to raise some money here.
1. MoviePass is losing a lot of money
If MoviePass is a deal that seems too good to be true -- offering its more than 2 million members access to as much as a traditional screening of a movie per day for just $9.95 a month -- you're right. MoviePass pays retail for most of those tickets, so a subscriber is already running at a loss for the company even if they see a single movie in many cases. The country's leading exhibitor revealed late last year that it was collecting $11.88 per ticket from MoviePass.
Helios and Matheson argues that MoviePass will be able to offset its costs by selling the data that it's collecting, get paid to promote theatrical releases, and grab a piece of the multiplex action. It has already negotiated deals with smaller chains for as much as a 20% discount of the ticket prices. It's also hoping to score a portion of concession sales. Larger chains have not played along, but MoviePass' leverage should grow as its subscriber base climbs.
We've never had a clear snapshot of how much money MoviePass is losing, but we got closer this week. Helios and Matheson filed its annual report on Tuesday. It recorded a $150.8 million loss in 2017, but that didn't provide enough of a glimpse into the carnage. A lot of non-MoviePass items made up the lion's share of that hole. The MoviePass acquisition didn't hit the books until Dec. 11, with just three weeks to go in the fiscal year.
However, we got a clearer but still fuzzy admission of the related red ink in Wednesday night's offering filing. Helios and Matheson believes that its average cash deficit has been roughly $20 million per month from the end of September through the end of March. We're looking at roughly $120 million over the past six months, and that's a cash -- not fiscal -- deficit. The assumption here is that it's including all of the folks who have prepaid for several months or as long as a year of service, and MoviePass had $54.4 million in deferred revenue at the end of 2017. When you also consider that this is an inverted scalable model where it's losing more money the larger it grows (making the deficit much larger for March at the end of that six-month average than October at the beginning), this is probably a company losing a lot more than $20 million a month.
Helios and Matheson had $42 million in cash at the end of March. Even with access to credit, it can only be selling discounted annual subscriptions for so long before the cash crunch comes. The $150 million will help.
2. Throwing the lead underwriter a bone
The first reason is the only one you need to justify a deal that will take the current share count of nearly 53 million to at least 88.6 million, but it's also not a surprise that Canaccord Genuity is the sole bookrunner for the offering.
Canaccord analyst Austin Moldow has been a prolific bull on the stock. Earlier this month, he reiterated his buy rating and ambitious $15 price target following MoviePass' acquisition of Moviefone. A firm touting a $15 price goal shouldn't have a problem selling the units in the offering for a couple of bucks apiece. We'll see how things play out, but the stock opened 35% lower on Thursday. Helios and Matheson and MoviePass have a lot of work to do even if this offering is successful in raising the money needed.