MoviePass to spin off into its own company, capping off a dramatic rise and fall

The parent company of MoviePass announced plans on Tuesday to spin off the discount movie ticket subscription service into a separate public company — another chapter in what has been a staggering rise and fall.

The biography of MoviePass sounds like, well, a movie. Once a hot startup that promised to apply Netflix's subscription model to the big screen, the service now looks set for the cinematic scrap heap. 

The new subsidiary will be called MoviePass Entertainment Holdings Inc. and be a film production, marketing and exhibition company, the company said Tuesday. MoviePass Entertainment is expected to list on the Nasdaq or an alternate trading market.

It wasn't supposed to end this way. In 2012, Business Insider called MoviePass one of the top 25 most disruptive apps. And as recently as a year ago, shares of MoviePass's corporate parent, Helios and Matheson Analytics, traded for a whopping $5,000 apiece, with investors seemingly convinced that MoviePass would become the Netflix of movie theaters.

The comparison to Netflix wasn't accidental -- it was one Helios and Matheson sought to stoke. After buying a majority stake in MoviePass in August 2017, the company touted the service by saying it "completely disrupts the movie industry in the same way that Netflix and Redbox have done in years past." 

"With our big data and artificial intelligence platforms and other technologies that we own, we will be able to bring a significant technological advantage to MoviePass," Helios and Matheson asserted of its purchase.

Some three weeks later, Helios and Matheson shares were surging into quadruple digits.

At the same time Helios and Matheson was predicting big things for MoviePass, the company was still bleeding red ink. In mid-2017, shortly before the deal was announced, it had accumulated a deficit of $55 million, according to a regulatory filing.

Today, Helios and Matheson's stock trades for fractions of a cent, and New York prosecutors are investigating it for allegedly misleading investors. The company's accountants have expressed doubt about its prospects.

Helios and Matheson denies any wrongdoing, and said it was cooperating with the inquiry, first reported by CNBC on Wednesday.

"We believe our public disclosures have been complete, timely and truthful and we have not misled investors. We look forward to the opportunity to demonstrate that to the New York attorney general," the company said in a statement.

Helios and Matheson did not return a request for comment.

Although it remains uncertain what investigators might uncover, there have long been questions about MoviePass' business model. Started in 2011 by entrepreneurs Stacy Spikes and Hamet Watt on the premise of letting people see a movie a day for a monthly fee, MoviePass pays theaters full price for every admission. That meant MoviePass could only make money if more people pay for the service than actually go to the pictures. 

As it was running low on cash this summer, MoviePass tried to stanch the bleeding by limiting users to seeing only three movies per month. Previously, the service let subscribers watch up to one film a day for $9.95 a month. It also began charging its more than 3 million members extra for the most popular films and desirable showtimes. 

The company's financial woes in July interrupted the film service for customers, seemingly until Helios and Matheson paid merchant and fulfillment processors. The company's accumulated financial deficit as of mid-year: nearly $248 million, according to a regulatory filing.

Turmoil inside, as competition mounts 

In resigning from Helios and Matheson's board in August, one director accused its leadership of keeping boardmembers in the dark about the its business, a charge the company denies.

The company faces other legal problems. Two class-action lawsuits accuse the company of misstating its prospects by among other things, describing its business model as "sustainable" in press releases.

Adding to its woes, MoviePass is trying to fend off competition from the nation's largest cinema chain. AMC Entertainment said this month that its Stubs A-List subscription service had more than 400,000 subscribers a little more than three months after offering users three films a week for $19.95 a month.

Meanwhile, MoviePass didn't help its cause with former subscribers earlier this month, who reported getting emails telling them that unless they opted out, they would be re-enrolled in the same plan they had previously signed up for.

The company has now postponed a special shareholder meeting that had been scheduled for Thursday until Nov. 1 to vote on a reverse stock split, a bid by Helios and Matheson to prevent its delisting from the Nasdaq.

The company's closing stock price on Friday: 0.0168 cents.