Why You Should Avoid the MoviePass Spinoff

Moviegoers reacting to a horror film.

Troubled movie ticket subscription service MoviePass is being set free. Owner Helios and Matheson Analytics (NASDAQ: HMNY) announced it has confidentially submitted to the Securities & Exchange Commission the paperwork necessary to spin off the business as a separately traded company.

Because Helios & Matheson has become synonymous with what is largely a failed business that burns through cash at an alarming rate, it believes it can salvage its own reputation by separating itself from the ticket subscription service. It will still be the majority owner of MoviePass, but it will have its own identity to the public. Investors, however, ought to steer clear of this spinoff.

Moviegoers reacting to a horror film.

Image source: Getty Images.

A vertically integrated movie business

A new subsidiary called MoviePass Entertainment Holdings was created to be the vehicle that will own MoviePass and all of H&M's other movie-related businesses, including Moviefone, the MoviePass Films production company, and the business it created to invest in movies, MoviePass Ventures.

H&M will then distribute a minority of the outstanding shares of MoviePass Entertainment common stock as a dividend to its shareholders while H&M retains a controlling interest.

A lot is still unknown about the spinoff, as Helios and Matheson says, it doesn't know just yet how many shares it will issue or when, though it's expected to begin following the SEC's review of the filing, called an S-1. The release is also based on the condition that H&M will be able to list shares on the Nasdaq or, failing that, some other bourse (stock exchange). It originally proposed the spinoff last October.

The risk to investors from a MoviePass spinoff is that it's still a business hemorrhaging cash. Despite implementing cost-cutting measures, which H&M says had "an immediate and materially positive effect in reducing the Company's monthly cash deficit," it's still losing money, and it still needs to raise capital to finance it.

More is less

H&M also filed with the SEC a separate notice that it wants to effect another reverse stock split, anywhere from a ratio of one share for every two shares owned up to as much as a 1-to-500 ratio. H&M implemented a 1-to-250 reverse stock split last July, but the stock quickly cratered again. It tried to do another reverse split last October but shelved the effort after it failed to generate enough investor support.

Whether a new stock split attempt will similarly fail remains to be seen, but H&M says it's in serious danger of being delisted from the Nasdaq exchange, so if it doesn't get its share price back up over the $1.00 threshold, it will be booted. H&M says losing its listing would have worse repercussions than whatever harm might come from another significant reverse stock split.

The problem with MoviePass is that it was structured around a wholly unsustainable business model, such that it was virtually guaranteed to lose money with each ticket sold. The company has changed the offer several times from its original unlimited movies for $10 a month. The current options include three separate tiers, the most basic of which gives you three movies a month for $12.95 -- but the selection of movies is very limited. It has two other plans ranging in price from $17.95 to $21.95 per month, but there are simply better plans out there.

An innovator that may not outlast its innovation

AMC Entertainment (NYSE: AMC) offers three movies a week for just under $20 a month, with the only catch being that you have to go to an AMC theater. Sinemia offers three different tiers, but they start at $4.99 and max out at $19.99. Cinemark Holdings (NYSE: CNK) offers one movie a month at a discounted $9 price.

Because MoviePass has burned its subscribers in the past and has tried some shady maneuvers to get people to rejoin, people will be leery about signing up. That means that whether it's a part of Helios and Matheson or a separately traded company, it is likely doomed to failure.

MoviePass may have changed the way theater tickets are bought and sold, but the innovation will likely outlive the company, and investors should simply avoid being part of its eventual implosion.

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Rich Duprey 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 .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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