MoviePass is Crossing the Chasm Into the Tornado – We’re Dancing Man

As long-term investors in HMNYwe feel like we are dancing alone this week.  We have been rejected by the market, we are embarrassed, alone, we feel like maybe it would be less humiliating to just sit down, or leave the concert altogether.  This is the hard life for startups and their investors.   Being an innovator can be very lonely, sticking to an idea when everyone else is running away or rejecting you is one of the hardest things an investor can do.  People, humans, are animals, they run in herds.

Please take a couple minutes to watch and listen to Geoffrey Moore the originator of Crossing the Chasm walk you through this incredible example of “Dancing Man” from  2009 Sasquatch.  It is a fun video and it explains the phenomena of Crossing the Chasm better than a thousand more words here ever could.

I believe that MoviePass is now at the very scary and most critical juncture for a startup company, it is attempting to cross the chasm from Early Adopters to Early Majority.

Crossing the Chasm

 

All the signs of MoviePass attempting to cross the chasm are emerging at the same time.

  • Early Adopters are already in!  They love the service.  An incredible 83% of MP early adopters say they would recommend it to a friend.  The classic WOM* has been achieved.
    • The percentages neatly mirror the adoption lifecycle.  MoviePass is buying approximately 9-10% of Movie Tickets – matching the early adopter segment perfectly.
    • Mitch has stated consistently that the magic numbers needed to achieve profitability are 5 Million Subscribers and around 20% of tickets purchased.  I am sure Mitch knows these numbers land him just on the other side of the chasm, where the early majority adopts the service, and a new category is fully established.
  • Investors are losing their shit!   Investors, venture capital, always get very nervous at this point in the lifecycle, and this is why HMNY is getting killed in the market.  VC’s and Wall Street guys are big on vision early, and the freak out when it takes just a little more money or time to get to that vision.  They get impatient, they literally freak out, they demand their money back, they look to change management (which BTW has already happened at MoviePass), the give up.  I have seen it many times in other investments, crossing that chasm takes vision and balls that most investors seem to lack.
  • The media is freaking out!  This stage is where a lot of good ideas – (but weak companies) with strong early momentum with the early adopters often die.  As such it is understandable that the vultures of the media who love a good car crash and scary death spiral story are seizing the moment to create some clickbait headlines.  All of this should be expected right now.

I believe that MoviePass will cross the big scary chasm and live on as a big successful game-changing company.   I have not lost faith.  Here’s why.

  • Bankruptcy Looks Unlikely – No Debt Lots of levers
  • Product Changes to adapt to Early Majority customers are now baked into the product.   The incredible PR and WOM derived from the too good to be true offer has done the heavy lifting in for Early Adopter phase.  Limiting to a single view of any title and reducing fraud with ticket stubs are now in and reducing costs.
  • Lack of competition.  MoviePass has an incredible lead over any competition, and it’s is now extremely unlikely any more new entrants will come into this space.  Yes, there is that Turkish company, but they look like a Bing vs. a Google.  No brand there, the offer is weak, and can’t catch up.
  • The entrenched establishment now looks shaky and scared.  AMC lashing out at MoviePass and subsequently seeing their stock tank after an earnings beat – infused from MoviePass is all you need to see to know that MoviePass has the establishment wondering what the hell they can do now to stop this thing.   Again this is a classic crossing the chasm point, where the entrenched competitors realize they have to make some kind of move.  I think it is too late for AMC, they will have to acquiesce.
  •  I have a gut feeling Early Majority has already started.   As I have written about many times in the past, at my local theater the employees I talk with estimate that MoviePass is making up around 30% of tickets sold.   These are kids, who don’t have all the data, but they see people coming in every day, and they know the trend.  These kids say they are seeing the demographics change to more “normal” people, not just movie fans.  That my friends is the beginning of crossing to the Early Majority!   This is a hard one to put a finger on, pure data can lie to you when trying to figure out if the cross to Early Majority is underway.  Truly it is a gut feeling tied to data that tells you when that transition is underway.  The kids working at the theater are feeling it!

So what should investors in MoviePass do now?

Well,  first of all, I have learned one big lesson, don’t take my advice for timing, so far my advice on timing has been terrible, and for that, I truly apologize.  Mark Gomes got the timing so much better than me, if you are a trader looking for a quick turn, I would yield to him on timing calls, he has nailed it – so far!     I hate losing money, and I hate it when friends, readers, and others lose money.  So far, I have not lost money because I have not sold a single share, but man do I wish I would have listened to Mark about my entry point for this stock.  Calling tops and bottoms is really hard, and I missed here.

With that govelling out of the way.  My advice to those who are already in the stock, I think you should on and see if MoviePass can indeed Cross the Chasm, if they do, you will be richly rewarded.

If you have not read Geoffry Moore’s Crossing the Chasm, I highly recommend reading it – it is a classic and one I think all serious investors and entrepreneurs should read and understand.

I also highly recommend “Inside the Tornado”, which adapts Moore’s original works to be more relevant to B2C disruptors like MoviePass.

*Word of Mouth 

Chapter & Lesson # 3

 

Chapter 3 

“Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly drive it to completion.”  

Jack Welch 

I decided that when I got my second shot at working at Microsoft I was going to treat that opportunity very differently.  I had a little bit of experience in the real world now.  Even I could now see how PC’s were going to completely transform the workplace.   I was not visionary enough to fully understand how much PC’s were going to change the home, but it was pretty obvious that PC’s were going to be important in many homes very soon.   Of course, Bill Gates had the powerful vision of a PC on every desktop in every home, but that seemed like a distant pipe dream back in 1994.  But when Bill spoke, people listened, and he had a way of making the un-seeable seeable.  For all that has been said and written about Bill Gates, to me at least, he exemplified a bold and strong leadership combined with an amazing vision unlike I had ever seen.  

Gates in my very limited interactions with him, was the real deal, just an absolutely incredible person.  Bill’s vision, intelligence, drive, his massive depth and breadth of so many different areas was just unbelievable to witness. I was amazed and impressed whenever I was fortunate enough to have a meeting with him or hear him speak.  It was just an incredible privilege to be around him.  Whatever you think about Microsoft, its products, its business practices, you can never take away the incredible person that is Bill Gates, and the lasting impact he has had and will continue to have on our planet.   He has made a big dent in the universe. 

So much has been written about Bill Gates that it is hard to come up with anything particularly novel or new to say about the man.  One of the things I always appreciated about Bill was his unique ability to take extremely complex and technically difficult problems and simplify them so that anybody could understand them.    

A meeting with Bill was something that could take weeks to prepare for.  Most of the meetings with Bill were to seek strategic direction, either for a product specifically, or for some kind of directional or strategic advice on the business.  Bill was always amazingly deep on both topics, so much so that you would fear he might ask a question that you had not thought of, and he often would!   When particularly difficult decisions needed to be made, Bill had an incredibly elegant way of weaving his deep technical product knowledge with his insanely good business acumen to come up with what would often be an obvious solution, where he would plainly explain the answer.   

It was amazing to watch Bill lord over meetings with his superior intellect combined with his reputation as the great founder of Microsoft; with his jabbing quick smarts, and his sometimes wicked tongue, he was the only person I have ever seen who could command the respect of Microsoft’s biggest egos and bring them quickly inline.  His leadership was simply unmatched. 

Learning Lesson #3  –  Only work at a company where you truly admire the leadership.   When you truly admire the leadership of the company you work at, the hard times and the difficult things you encounter each day are much easier to deal with.     There were plenty of hard times, bad days, and screwed up things happening at Microsoft during the 20 years I was there.   When you are lucky enough to have great leadership at the top, you end up trusting that good decisions will ultimately be made about the big things that really matter.   This makes it infinitely easier to deal with all the little stupid things that happen in big organizations all day long.   After Bill left the company, it was clear that Steve Ballmer didn’t have anywhere where near the intellect, vision or leadership qualities that Bill did.   You could never be sure if Steve would make a good decision on the big things that mattered, he was way more random, insecure and for my taste a more difficult personality to deal with.    The longer Steve was in power, the more you could watch the company lose its way.   When a company feels lost at the top, the stupid things that happen every day at all companies seem to feel much worse.  You can put up with a TON of bullshit if you feel like you are heading in a great direction overall.  

Why Did HMNY (MoviePass) File That Alarming 8K?

We all now know that HMNY filed an 8K that set off alarm bells, causing a media panic claiming MP was close to running out of cash, sinking the stock 60% in two days.

The specific statement read.

As of April 30, 2018, we had approximately $15.5 million in available cash and approximately $27.9 million on deposit with our merchant processors for a total of approximately $43.4 million. The funds held by our merchant processors represent a portion of the payments received for annual and other extended term MoviePass subscription plans, which we classify as accounts receivable on our balance sheet and which we expect to be disbursed to us during the course of 2018. We believe that our average cash deficit has been approximately $21.7 million per month from September 30, 2017 to April 30, 2018. By the end of April 2018, we implemented certain measures to promote the fair use of our MoviePass subscription product, which we believe should reduce our monthly cash deficit significantly. These measures include a technological enhancement which prevents MoviePass subscribers from sharing their accounts with non-subscribers and allowing subscribers to see a movie title only once per subscriber using the MoviePass subscription. We believe these measures enabled us to reduce our cash deficit during the first week of May 2018 by more than 35%. In addition, by returning to our $9.95 per month unlimited MoviePass subscription, enabling subscribers to see up to one new movie title per day, we believe our subscriber acquisitions and subscription revenues will continue to increase for the foreseeable future. However, we will need proceeds from sales of our common stock pursuant to our Equity Distribution Agreement with Canaccord Genuity, or other sources of capital, starting in May 2018. Further, if we use all or a portion of the anticipated net proceeds from sales of our common stock pursuant to our Equity Distribution Agreement with Canaccord Genuity for acquisitions of other companies or financial interests in additional movies (through our subsidiary, MoviePass Ventures), we will need additional capital to offset our monthly cash deficit. In 2018, we expect our cash deficit from month to month will vary significantly based on the amount of movie tickets MoviePass is required to purchase for its subscribers during the month, the amount we spend on acquiring financial interests in additional movies through MoviePass Ventures, the amount we may spend on any other types of acquisitions, and our ability to develop the MoviePass business model in the near term generally, including developing and growing sources of revenue other than subscription revenue. Because the length of time and costs associated with the development of the MoviePass and MoviePass Ventures business model is highly uncertain, we are unable to estimate the actual funds we will require. If we are unable to obtain sufficient amounts of additional capital, whether through our Equity Distribution Agreement or otherwise, we may be required to reduce the scope of our planned growth or otherwise alter our business model, objectives and operations, which could harm our business, financial condition and operating results.

But many of us could not figure out WHY the company came out with this statement, and why NOW?!  There was very little new news in the statement.   If you break it down, the company said they will need to raise more cash, which they have already said they had planned to do by selling shares, and they said they would do this as they needed the funds.  So that was nothing new.   The cash burn level reported was also not new news.  Mitch and Ted have both said that they were burning in the $20M a month range in several previous interviews.   The statement also said that management had taken steps to reduce COGS, and that by adding the limitation of only seeing a title one time, and enforcing photos of ticket stubs, had reduced usage and fraud, helping to bring usage down more than 35%.   This was great news, but it had also been mentioned in prior interviews earlier in the week.  Nothing really new again!

So why then did HMNY – MoviePass -feel the need to release this 8K at all?   I have researched this, and the answer is that this is a requirement that they must fulfill by SEC regulation based on that fact that they are operating under a “going concern” audit finding.    The going concern part of this is nothing new.  In fact, it has been known for some time now.   What most investors do not realize is that once you have this finding attached to your company, the disclosure rules for the company change.

This is a complicated bit of accounting rules and regulations and if you want all the details you can read them here.  But the cliff notes version is that any updates both positive and negative that could significantly impact the “going concern” status of the company must be announced as they occur.    So the changes to MoviePass to reduce cash burn had to be disclosed.  And with those changes, the change to the cash position, and the intention to stick to the plan of raising more money with additional stock, also had to be disclosed.  Regardless of the fact that both of these things were already known by investors who were closely following the company.

To put a fine point on it – new developments that are POSITIVE – that will help reduce the “going-concern” issue with the company, must be disclosed.

Specifically —-

“The going-concern standard explains that these disclosures may change over time as new information becomes available and that disclosure of how the substantial doubt was resolved is required in the period in which substantial doubt no longer exists (before or after consideration of management’s plans). In addition, the going-concern standard states that the mitigating effects of management’s plans to alleviate substantial doubt should be evaluated only if (1) the plans are approved before the financial statement issuance date and (2) dboth of the following conditions are met: a. It is probable that management’s plans will be effectively implemented within one year after the date that the financial statements are issued. b. It is probable that management’s plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued.”

It is reasonable to believe that Mitch and Ted actually believed that the filing was routine and that there was some substantially positive news in the filing that had only been mentioned one or two times in TV interviews, and this filing would make it official that MoviePass is making great progress in moving toward a more profitable future.

Unfortunately, the 8K hit within less than 24 hours of AMC CEO Adam Aron throwing MoviePass under the bus.   Adam made a bunch of nasty and false comments on how MoviePass was certain to be in a death spiral.  And made a bunch of false assertions on usage amongst other bizarre comments.

The timing could not have been worse for HMNY to release the 8K, it set off a literal $hit storm of bad headlines, causing retail investors to panic sell the stock.

Was this bad execution on the part of HMNY?  Probably – however as SEC forms go, it takes a few days to file them and companies may not know exactly what day the form will hit the SEC website.   So maybe it was just unfortunate bad timing.

Should HMNY and MoviePass do more to stop the stock price from falling?  Maybe, but there could be other restrictions they are under for releasing information.  We are close to ER, where there is normally a quiet period prior.  Also, we don’t know what is happening with the final acquisition of MoviePass and the rebranding of HMNY to MoviePass.  Also, we don’t know what is happening with the spinoff of Zone and if there is a quiet period there.

It is actually possible that this entire episode is very much ado about nothing.  And that Mitch and Ted both have their hands tied in how much more they can really say to calm investors fear of near-term Bankruptcy.   Afterall, Farnsworth and Lowe have both stated in separate interviews that they are confident they have plenty of options for additional funding and that they at least are not worried at all about insolvency.

My conclusion, the drop was scary and shook out a lot of early shareholders and retail investors who just don’t have the stomach to take these kinds of losses, even if they are just on paper until you sell.  The series of events was a great gift to the short sellers who are paying big money to short this stock because they don’t believe in the model, or they have ulterior motives for wanting to have HMNY not be successful.

It seems unlikely that HMNY is headed for Bankruptcy anytime soon given they have virtually zero debt, and a lot of options to keep on trucking as a “going concern”.

My view – if you liked this stock at $7 or $4 or even $2 – you should love the stock NOW at .85 cents!

Nothing significant has really changed!   Go review all the video interviews I have cataloged here.   You will see that the story has been consistent, that there was really no big new news at all, and that Farnsworth and Lowe consistently have said they would need to raise more money as they built out a 5 Million user subscriber base.

Don’t let greedy Wall Street hedge funds and sneaky short attacks from competitors like AMC scare you out of what will be a great long term investment!   Hang in there, average down if you can stomach it.

As Mark Twain once said.

“The rumors of my death have been greatly exaggerated”

What the heck is going on here! Is MoviePass really going BK?

The past couple weeks have been admittedly rough for HMNY investors.   I have continued to stay long, but I have not been enjoying the ride much.  My time horizon is multiple years, and I still believe longterm MoviePass has a very good chance of not only surviving but thriving.  Today was particularly ugly with the 8K filing that set off alarm bells for longs and gave shorts another day in the sun to predict near-term doom for MoviePass.   AMC’s CEO Adam Aron bashing the company and spreading more FUD, also did not help matters much either.   The mainstream press seized on  the 8K filing, and went for blood with scary headlines predicting near-term bankruptcy.

Spoiler – I do not think MoviePass is headed for Bankruptcy.   I still believe the MoviePass model can and will work.    I have said it before, MoviePass really should not be a public company yet.  And in many respects, they really still are not fully a public company.  But by Proxy – via HMNY they are close enough.  At least for retail investors who have wanted to get a piece of the action on MoviePass’s business.

I am pretty sure there are a whole lot of HMNY investors who are kicking themselves right now.  Wishing they had stayed away from this stock, and who could blame them given the rapid descent of the stock price.   So far, the bears have been right, and shorts have made good money betting against MoviePass.

I still believe we are in very early innings for MoviePass.   And while I think it is problematic for the company that shares have dropped to this low level, I don’t think it is a catastrophic situation.   The short attack on the company has undoubtedly been successful, and it has put the company in a more difficult position for raising funds.   There is no way to escape it, this makes things harder for MoviePass.  Selling shares on the cheap is a rough way to raise money, and convincing lenders to fund further sub growth will be difficult and expensive given the scary headlines.    I expect to see this narrative linger for at least a few months.  Maybe until the end of the year.  Yes, it will come with dilution, and it could also come with share price staying under pressure.

I don’t see bankruptcy as a likely outcome here.  The primary reason is that the company has no debt.   So really only HMNY management can decide if they want to try and take BK route if things get that bad, but by doing so, they gain very little.   Hell, at this point, even the whining about Farnsworth’s market cap incentives seems wildly misplaced.   At the current market cap of about $78 Million – Farnsworth will get exactly ZERO from his market cap bonus structure.  At this point, I would love to see nothing less than a 100% payout to Farnsworth if he can hit these goals!

I continue to believe that Farnsworth and Lowe have a LOT of levers they can pull to further reduce the cash bleed, while still maintaining reasonable subscriber growth.    Do remember that the MoviePass terms of service give the company a lot of options for changing the service in any number of ways.   Removing the ability to see a movie more than once, and forcing photos of ticket stubs were successful in bringing ticket COGs down by 35% – I believe the company can go even further to reduce COGs.

A few ideas for further reducing COGs

  • Have one day a week where only partner theaters are available for MP subscribers.   This would give a great bonus to those who are playing nice with MP, and it will sting the chains who don’t play nice.  It would also reduce consumption 4 days a month.   I think they could do this without infuriating the subscriber base.  MoviePass just needs to be open and honest with subscribers, and communicate with them upfront prior to making a move like this.  People LOVE their MP, and if well guided, they will help do their part to keep the company in business.
  • Block opening weekends for more big blockbuster films.   I know many will howl at this, but I contend that a very large number of MP customers will not care if they have to wait 2-3 days to see the big BB film.  By doing this, it will reduce some consumption, and will also offer more value to chains, helping them fill more seats that would otherwise go unfilled as perishable inventory.
  • Cut off some AMC theaters where there are obvious good alternatives – if a deal can be struck with competitors Regal etc.   AMC is trying to kill MoviePass with a smear campaign, and playing hardball here will be understandable by most MP customers.  Again, MP needs to step up the PR machine here and get the customer on their side.   They are just not doing enough to make their loyal customers part of the solution.
  • Encourage Customers to be part of the solution to reduce costs!   Ask loyal customers to frequent matinees when convenient, use MP like you would use your own money.   Honestly – I think a lot of customers would be happy to help if it means the company stays viable.

There are other much more draconian ideas we could all think of to reduce costs, but obviously, the company does not want to take any measure that will kill its ability to scale.   That said – if the decision is BK or more draconian cost reductions, particularly to slow down the heavy users – MOST will accept the draconian measures over BK.  And remember, 88% of the subs are not a problem, we are only trying to slow down the hogs!

  • Simply start kicking out the heavy users.  If they are month to month users, don’t renew them.  Offer the heavy user a $29.99 plan.   I think about 1/2 would take it.
  • Start restricting the movies that heavy users can see.  Limit their options and limit the theaters they can go to.    Yes that sounds harsh, but to avoid BK, MP may need to start getting harsh with the hogs!

The point is – there are a LOT of levers, and a lot of options for MP to stay in business and provide an excellent value to the vast majority (88%) of their customers who do not drain the bank every month.   Making the talk of any near-term BK very unlikely.

Things are not quite a pretty as they were a couple months ago.  The share price has fallen far below where I thought it would fall.   But I think the story still works, I think the business model can still work with some tweaks.   I have not given up.

Finally – if you believed that MoviePass would work from my previous models.  Which of course I do believe, than you should now love the stock even more after MoviePass has successfully implemented the cost reductions they now have in place.

From the  NY POST article today:

Farnsworth, however, disputed AMC’s figures, saying MoviePass members had actually visited the chain an average of 1.8 times in April.

He added that MoviePass has slashed that number to 1.13 since it began cracking down on users who have been sharing their memberships and watching the same movie more than once.

“Anything below 1.5 for us is great, because you can make it up with other revenues” from marketing deals and other corporate tie-ins, Farnsworth told The Post.

I understand a lot of people are scared, and they don’t trust Farnsworth anymore, and I can’t totally blame investors for that.   However, if pressed, I find only a very few things where Farnsworth has not been totally clear, and I have not seen flat out lies.  Missing projections does not equal a lie – BTW.   That is why they call it an earnings miss.  Not an earning LIE.  They are guesses at the future.   Is Farnsworth a bad guesser?  Maybe!  Has he been wrong with other businesses in the past, yes.   Does he deserve the benefit of the doubt when he speaks about MoviePass now, only you can decide.  But if you truly don’t trust the CEO and think he is a liar, I would avoid the stock anyway.

So I have an updated model on the model page with 1.13 Utilizatoin rate.  And that looks very promisting indeed.   It all depends on who and what you want to believe.  That hasn’t changed!