MoviePass said a $300 million lifeline could sustain it for over a year, but that money could slip through its fingers

MoviePass/Reuters

MoviePass CEO Mitch Lowe and Helios and Matheson CEO Ted Farnsworth.

• MoviePass has said repeatedly that it's not worried about sustaining further losses because it has a $300 million "equity line of credit" that could keep it going for over a year.
• Financial experts, however, say the financial instrument described by MoviePass CEO Mitch Lowe is not what is generally considered to be an "equity line of credit," and is subject to the whims of the public market.
• To get access to that money, MoviePass will have to convince investors of its long-term viability and potential for profit.
• On Wednesday, MoviePass parent company Helios and Matheson was trading at an all-time low of $0.46, down over 98% from its 52-week high, with a market cap of under $39 million.

Don't worry, everything is fine. That's been the message from MoviePass and its parent company, Helios and Matheson (HMNY), in recent weeks as the company's financial health has become a topic of heated debate.

MoviePass has been burning over $20 million a month, but its leadership repeatedly stressed it had access to a $300 million "equity line of credit." The comments were intended to address concerns that MoviePass might go out of business. The lifeline meant the company could sustain itself for over a year without needing additional funds - long enough to figure out how to stem its substantial losses.

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But after speaking with MoviePass CEO Mitch Lowe, consulting financial experts, and reviewing HMNY filings with the SEC, it's clear that the $300 million in financial firepower is less secure than at first blush, and is dependent on selling shares to a fickle public market. And it's not really a "line of credit" as generally defined by the financial community.

To get access to that money, MoviePass has to convince investors of its future prospects, a big ask given the stock is down over 98% from its 52-week high in October. HMNY stock was trading at an all-time low of $0.46 on Wednesday, and the entire parent company is now valued at under $39 million.

The current state of affairs for MoviePass

HMNY disclosed in filings this month that it had been losing nearly $23 million per month in the first quarter of 2018 (though the company also said it had found a way to cut losses by more than 35% in May). HMNY only had $15.5 million cash on hand at the end of April, and some industry observers, including AMC's CEO, publicly questioned how it would keep going. HMNY's independent auditor said it had "substantial doubt" about the company's ability to survive a year.

MoviePass leadership fired back, with HMNY CEO Ted Farnsworth telling Variety he was "not worried at all" about the cash situation. Why? He said HMNY had a "$300 million equity line of credit," a term he used in an email (via a spokeswoman) to Business Insider. The line of credit was also referenced in articles on MoviePass by The New York Times, Reuters, and Variety.

Business Insider

The "equity line of credit" question

So this lifeline would supposedly save MoviePass for at least another year. But what exactly is this "equity line of credit" MoviePass keeps talking about?

MoviePass CEO Mitch Lowe told Business Insider that the term referred to the "at-the-market" (ATM) sale of the remainder of a shelf offering certified by the SEC. By Business Insider's calculations (based on SEC filings), less than $265 million remained of the original $400 million as of April.

Here is Lowe's explanation in full:

"So the SEC approved for Helios and Matheson the ability to sell up to $300 million of its stock in the format of what is called an ATM ["at-the-market" offering]. An ATM essentially means you can put on the market shares on a daily, weekly basis, and feed them into the market and as long as people want to buy them, then that money can go into the coffers of HMNY and therefore go into MoviePass to fund our growth - to fund our ticket purchasing and our acquisition of subscribers. It's kind of a science in that you can't put all $300 million out there. You put a little bit every day. If you look at how many shares are sold every day, I think there are some days, 25 million shares, 10 million shares. I think the average is 6 million shares. So you can imagine you can put four or five hundred thousand shares out there without having much impact on the demand. I have no idea. It's a third party that manages it on behalf of HMNY, but essentially some days they might sell, some days they might not sell. It's all kind of based on what they believe will have the least impact on the valuation."

What Lowe is describing is an "at-the-market offering," not what is usually considered to be an "equity line of credit," according to several financial experts.

A Wall Street analyst who covers HMNY told Business Insider that an "equity line of credit" was a "confusing" way to characterize such a stock offering. Erik Gordon, a professor at the University of Michigan's Ross School of Business, said it was "not the way most people think of an equity line of credit."

MoviePass did not respond to multiple requests for further clarification.

Why is it not a line of credit?

An "equity line of credit" implies that an investor has already agreed to buy shares at a maximum price. (Here's a guide from law firm Morrison & Foerster that explains it in more detail.) It's money in the bank if the company wants to take it, during a certain time period and under certain conditions.

But in an "at-the-market" offering, which Lowe is describing, HMNY is at the mercy of the public market. HMNY is authorized to sell shares, but someone has to buy them. This is not a guaranteed line of credit.

The idea behind an offering like the one HMNY is using is that you do the SEC paperwork up front, and then you time the selling of shares based on your need, as you prove your business model, Todd Lowenstein, director of research at Highmark Capital, explained to Business Insider.

Farnsworth told Variety this month that HMNY had "17 months worth of cash without further raises of capital."

But as Lowe describes it, the ATM offering is only effective "as long as people want to buy" the shares. That is not certain given the negative investor outlook on the company, with the stock price down at $0.46 per share, with a market cap of under $39 million. It's down over 98% from the 52-week high.

Tracey Trevino

A MoviePass customer's ticket stub collection.

What are MoviePass' chances?

"If they can sell stock, the most likely buyers are related parties, bottom feeders, or people who think the company is on the cusp of a turnaround," Gordon said. "It is unlikely to be an easy sell."

At this stage, those who would be buying are the "true believers," Lowenstein said. And if HMNY has to sell tons of stock to cover its costs, after such a huge drop in price, it will massively dilute previous shareholders.

MoviePass is also at risk of getting kicked off the Nasdaq by mid-December if its share price and market cap don't increase, as my colleague Troy Wolverton noted recently. Lowenstein called it the "specter of delisting" hanging over the company's head.

The big question now is whether MoviePass can keep investors happy long enough to find a way to become profitable, because the line of credit that was supposed to sustain the company could easily slip out of its grasp.

Its survival depends on it.