MoviePass could be delisted from the stock market soon. Here's what that could mean for the company and its beleaguered investors
- MoviePass's parent company, Helios and Matheson, is in danger of having its stock delisted by the Nasdaq within weeks.
- The company has failed to meet a key listing standard - its shares have traded below $1 a share for most of the last seven months.
- If Nasdaq delisted the stock, it would trade in the over-the-counter markets.
- That could lead the stock to fall even farther in value and could make it hard for investors and the company to sell shares.
- Helios and Matheson could delay the delisting by appealing it or getting a six-month extension to boost its stock.
As bad as this year has been for shareholders of Helios and Matheson, the parent company of MoviePass, things could soon get even worse.
The company's stock is in danger of being delisted by the Nasdaq national market, potentially as soon as December 28. If and when that happens, its stock could plunge even farther than it already has, and shareholders could have a tough time selling their shares.
Worse, the company could find it difficult to raise new funds by selling additional shares - the chief way it's kept itself in business this year amid mounting losses.
"The delisting itself is clearly bad news," said James Angel, an associate professor of finance at Georgetown University's McDonough School of Business.
Representatives of Helios and Matheson did not respond to an email seeking comment about the potential delisting.
Helios and Matheson has been trading below $1 a share
Helios and Matheson shareholders have already absorbed a bunch of bad news this year. MoviePass' $10-a-month subscription service, which initially excited investors and boosted the company's stock, proved to be a boondoggle. In just the first nine months of this year, Helios and Matheson has burned through $321 million in cash from its operations alone, almost entirely due to MoviePass. It's kept afloat by issuing and selling billions of new shares to the public, in the process massively diluting its investor base - and sinking its stock price.
The Nasdaq requires that all listed companies and their stocks meet certain requirements, among them that they trade over $1 a share. Thanks to Helios and Matheson's massive stock sales, its shares fell below that threshold in May and, with a brief respite after a reverse split in July, have stayed below it since. The company repeatedly warned investors that Nasdaq had given it until this past Tuesday to get back into compliance.
On Wednesday, according to a document Helios and Matheson filed Friday with the Securities and Exchange Commission, the Nasdaq warned the company it would suspend trading in its stock on December 28 and would move to delist it. Helios and Matheson said it would appeal the decision, which would put the delisting process on hold until the Nasdaq hears its appeal, and could potentially avert the stock's removal if the company wins.
But its prospects of prevailing in the appeal, which is slated to be held within 45 days of the company officially filing for one, look dubious. The Nasdaq already denied the company a second 180-day period to get its stock above $1 a share. The market's staff said they didn't think it was possible for Helios and Matheson to do that.
Read this: MoviePass's parent company is in dire danger of having its stock delisted by the Nasdaq
That would leave the company's stock trading in the over-the-counter markets. Although investors could still buy and still shares, such a move could prove disastrous for the company.
"Very few companies come back from delisting," said Kevin Mak, director of the real-time analysis and investment lab at Stanford's Graduate School of Business.
Its stock could take a further hit if it gets delisted
Companies that get delisted from major exchanges often see an immediate drop in their stock value, market experts said. With its stock trading lately at less than 2 cents a share, it might seem that Helios and Matheson has nowhere left to fall. But some stocks in the over-the-counter markets are trading for as little as 0.01 cents a share, Angel noted, so it could have plenty of room left to fall.
Part of the reason why stocks that are delisted see an immediate share price decline is that many institutional investors aren't permitted to own stocks that aren't on the major exchanges, said Mak. If the Nasdaq does drop Helios and Matheson's stock, it could force mutual funds, pension funds and other big investors that still hold its shares to dump their investments, he said.
"It's generally going to be something that's going to cause them to sell," he said.
Another problem for companies whose stocks trade over the counter - and their investors - is that their shares can be harder to buy and sell. It's not just that many institutional investors can't trade such stocks, it's that many individual investors avoid over-the-counter markets as well. Because stocks that trade over-the-counter aren't subject to any exchange's listing requirements and have often ended up there because they don't meet those requirements, they're generally considered to be riskier investments.
Investors can still generally trade relatively small quantities of shares in the over-the-counter markets without too much trouble, the market experts said. But it can be much more difficult to buy and sell mass quantities, they said.
"You're less likely to find a counterparty if you want to trade," said Christine Parlour, a finance professor at the Haas School of Business at the University of California, Berkeley.
Helios and Matheson has depended on selling shares
Relatedly, the costs of trades made in the over-the-counter markets tend to be significantly higher than in the big national markets. The difference between the bid and ask prices for stocks listed on the big national markets tend to be a few pennies, or a small percentage of their share prices. The gap tends to be much bigger for over-the-counter stocks.
What that means is that buyers tend to have to pay more for shares than they would otherwise, and sellers tend to have to sell them for considerably less.
Such consequences of delisting could be particularly problematic for Helios and Matheson. The company had just $4.9 million in cash at the end of September, and burned through more than $100 million in cash in the third quarter despite trying numerous times to revamp its service to stanch its losses.
Typically if companies to fail to meet a listing standard after the 180-day period the Nasdaq gives them to come back into compliance, the market will send them a letter warning them they the don't meet the standard. Companies generally have four days to disclose such letters to shareholders.
The Nasdaq is able to offer companies a second 180-day period to get back into compliance with its listing standards. But it typically offers that extension only to companies that meet all of its other requirements except the one they've been notified about.
The company does have a strategy to avoid being delisted
In addition to having its stock fall below the $1 threshold, Helios and Matheson has failed since August to meet another key standard - having a board composed of a majority of independent directors and an audit committee composed of at least three independent directors.
However, the company has nominated attorney Joseph Fried to serve as a director. Should he be elected at the company's meeting later this month, he would bring Helios and Matheson back into compliance on those board requirements.
The company has been planning to try to get back into compliance with the $1 a share listing requirement by reverse splitting its stock, in effect trading one new share for two to hundreds of older shares. But it cancelled a planned shareholder vote on a potential reverse-split plan last month in the face of widespread shareholder opposition.
Helios and Matheson already reverse-split its stock once this year, in July. The company's stock stayed above $1 a share for less than a week, though, falling dramatically as the company resumed issuing and selling massive numbers of new shares.
In its regulatory document warning of the Nasdaq's delisting decision, Helios and Matheson said if the market gave it more time to get its stock above $1 a share, it would try again to get approval for a reverse split. It also said it would "continue considering all available options to resolve the company's noncompliance" with the standard.
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