What happened

From a "high" of just $0.45 last week to Friday's closing price of $0.31 per share, Helios and Matheson Analytics (NASDAQ:HMNY) -- the company that owns 92% of MoviePass -- lost nearly a third of its market capitalization. This week, the rout in Helios and Matheson stock is continuing, with shares sinking 7% on Monday and 13% more today.

As of 3:15 p.m. EDT, Helios stock is selling for just two bits -- a mere $0.25 a share.

A child in a Dracula costume standing behind a pile of pumpkins in a field.

Moviepass started as a cute story about an upstart fighting for consumers -- but may grow into a monster that will suck away investors' voting rights. Image source: Getty Images.

So what

Why are investors panicking over Helios? I'm sure that AMC Entertainment's (NYSE:AMC) decision to invade its discount turf with a $19.95-a-month movie subscription plan of its own has something to do with it. But there's also a self-inflicted wound to consider.

Last week, MoviePass filed a preliminary proxy statement with the SEC, informing investors that it plans to potentially:

  • Quadruple the number of its shares outstanding to 2 billion shares, diluting existing shareholders by as much as 89% in the process (because Helios only has 223 million shares outstanding today).
  • And/or conduct a reverse split of its shares, shrinking investors' shareholdings by as much as a 250-to-1 ratio (i.e. if you own 1,000 shares before the reverse split, you'd own just four shares at the end of it).
  • And to complicate matters further, Helios is issuing $164 million worth of convertible debt, and 20,500 shares of preferred stock -- with each preferred share conferring voting rights equivalent to owning 3,205 shares of common stock.

Now what

Investors owning shares of the company that owns most of MoviePass now face not just the prospect of seeing their company potentially beaten at its own game by AMC. On top of that, their reward for keeping faith with MoviePass and sticking with Helios stock through its growing pains is to be significantly diluted, and to have much of their voting power transferred away to some other unnamed investor(s) who are acquiring the preferred stock.

No wonder they're upset. No wonder they're selling.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.