What You Should Know About Helios And Matheson's 1-For-250 Reverse Split

In an effort to maintain its listing on the Nasdaq exchange, MoviePass parent company Helios and Matheson Analytics Inc HMNY shareholders approved a 250-to-1 reverse stock split Tuesday. Here’s a brief overview of everything investors need to know about the reverse split and why the stock is down 37 percent Wednesday morning.

The reverse split will push Helios’ share price from about 8 cents to about $21 per share, but the market’s negative initial reaction to the decision is typical of the response to reverse splits. Helios was forced into the aggressive reverse split after the stock crashed 97 percent in the past year after the company failed to demonstrate to investors that it could convert its expensive acquisition of MoviePass into profits.

Management’s Take

The Nasdaq exchange requires a minimum share price of $1 for listing, so Helios had no choice other than a reverse split to bring its stock back in good standing.

"We believe this is an important step that will facilitate our access to capital over the next several years and enable us to implement our growth plans for MoviePass, MoviePass Films and MoviePass Ventures, and will enable us to pursue potential acquisitions to grow our business," CEO Ted Farnsworth said in a statement.

Some institutional investors are forbidden from buying shares of stock priced under the $5 per-share and $1 per-share levels, but many would also balk at buying a stock that has lost 97 percent of its value in a one-year stretch.

Word Of Caution

Reverse splits are often a last-ditch effort for a company with nothing left to lose. Beyond maintaining their listings, stocks with share prices below $1 are seen by many traders as junk investments and dead-end companies.

Helios shareholders also voted to increase their maximum number of shares from 500 million to 5 billion to allow for more dilutive capital raises in the future, another potential red flag for investors.

Long-term investors especially should be careful about taking a stake in any stock following a reverse split. A recent study by Ibbotson & Associates found that reverse split stocks from 1926 to 2017 have underperformed the overall market by an average of 4.3 percent annually over the first five years following the reverse split.

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