HMNY – Delusion Dilution & a Little Bit of Disgust

I figured it was time to update my blog and say something about MoviePass.   I have to be honest, I have struggled to come up with anything new to say.  Even as the stock continues to get hammered, the overall story for MoviePass and the potential of the business seems to have not changed very much.  I stand behind the models I have published.   Others have proposed their own models including Mark Gomes and Julian Lin who did a sort of scattered model on Seeking Alpha, he used a crazy high Utilization rate and made no correction or even a mention any of the changes made by MoviePass to reduce utilization.   Gomes updated his model to reduce utilization, and his estimated cash burn rate has come down.   He is still pessimistic about the company.   I have not received any new information or any new reason to believe my models are off, and I have not heard a single argument for why my model does not work.

The primary argument people give me is that I am too optimistic and that Ted and Mitch are liars who can’t be trusted.   Both of which could end up being true, but for now at least, I am going to continue believing that they are running the company in good faith.  As to me being too optimistic, so far that has proven to be true, my entry point for this stock was bad, and continues to look worse on the daily.  I am an unhappy shareholder at this point.  I have averaged down, but do not plan to average down further, and won’t be buying any more of the stock until things stabilize – assuming that ever happens.

There are a lot of theories, some of which are more like conspiracy theories for why the stock has been hammered as hard as it has been.   I am not going to go into all of those here because most of them are just that, theories, and the fact is we don’t have any new official news from the company to work from.

For my part – I think I owe it to readers of my blog, and friends of mine whom I have recommended this stock to an update on my opinion as to what has happened here.  And that is how I titled this post.

Delusion: The definition of which is “an idiosyncratic belief or impression that is firmly maintained despite being contradicted by what is generally accepted as reality or rational argument, typically a symptom of mental disorder.”  I actually believe there is delusion on the bear side of the argument.   Others will obviously counter that I am the one being delusional.  No matter, maybe both sides are a little delusional here.   As I mentioned about, I stick to my model, and I have no substantive reason to abandon it.   On the bear side, the fear is palpable, hyperbolic shorts are pushing a BK scenario that makes no sense whatsoever, panicky weak hands are hanging on any chance of daily news, new articles predicting doom and total destruction are now regular multiple times daily.   If you believed the short to zero argument, you would have to believe that Ted and Mitch have no more cards to play and will walk away into the night with nothing from their efforts.  You also would have to believe there is zero value in 2.7 Million paying subscribers, zero value in the MoviePass brand, and zero value in MoviePass ventures.   That to me that seems to be at least a little bit delusional.  But ask yourself, is all of that worth nothing?  And does the company really have zero options left?

Dilution: The definition being: “a reduction in the value of a shareholding due to the issue of additional shares in a company without an increase in assets.”  Now this one gets a little bit tricky.   The last part of the definition is important to focus on.  “without an increase in assets“.    I believe that the ATM dilution is not happening without corresponding increased assets.   The assets, of course, are the new subscribers being acquired with the money raised from the selling of new stock into the marketplace.   The company has announced that it is on pace to have net additions monthly of 350,000 customers.   Unfortunately, this is not happening on the cheap, and this is why the dilution feels so painful.   And to some, it actually feels like there is no increase in assets at all.  Because if you don’t believe in the business model to begin with, you would of course argue that any new customers added are a liability not an asset.  And of course if you believe that there was no positive LTV of a MoviePass customer, you would just keep hammering away at the message that more customers will just drive the company down faster to zero, and hence you would short the stock hard, and try and continue to drive the price down further.   If on the other hand, you believe that the model does come close to breakeven when the company hits 5 Million Subscribers, you would then value the new subscribers as a valuable asset, in which case the dilution of your shares would be more acceptable to you, because you would accept that the company needed more money to grow the asset base.  This is the old argument of would you rather have 10% of $100 or 6% of $200.  The dilution fear is legitimate in cases where the money is not being spent well, or is just plain being stolen from shareholders.   If you believe that, you should not be in this stock.   Now, I am not saying that dilution is not a concern for the company, it is a concern because it is concerning to see so many new shares hitting the market.   Last checked total outstanding shares had gone up to 82.7M.   That is a lot more shares than when most of us started out with this company.   Now at today’s closing bell, the stock was trading at a measly  $.55 – Making the Market Cap 44.2 Million dollars.   There is still no significant debt for the company, and they do have a bit of cash in the bank.   Somewhere around $20 Million in cash.   So you are getting the company for about $25 Million bucks.

Yes! they are burning the cash up supporting new subscriptions – I am not ignoring that fact.  But if you pretend you are MoviePass god for the day and you could buy and run the entire company right now, you would be getting the cash, the subs, the brand and the MP Ventures movies already bought at a screaming good deal.

And, as MoviePass god,  if you wanted to, you could say – hell with it, I don’t want to lose another dime on subscribers, and you could change the plans to be even more restrictive and jack up the prices to a point where you kept all the cash and had a nice stream of revenue for quite some time.   Some, including Gomes, are suggesting that is now the best path forward.   I disagree with that path, but “reasonable” people are making that argument.

Dilution sucks, it makes it harder to get a huge huge gain out of a stock holding, primarily because the more shares out there, the harder you press up against the laws of big numbers.   If you believed that MoviePass was going to be a $1 Billion dollar company.  Now with $82.7 Million Shares out there, the stock only has to hit $11.49.   There are a lot of people who have shares above that price, and they are not happy to know that this is now the unicorn price for the stock.  I don’t blame them for feeling that way, and that is the problem with the entry point many of us had on this stock.   Gomes called it well, and I have given him a ton of credit for calling how the public market would react to funding growth via a public ATM offering.   Retail investors simply put, have not been able to deal with this very well at all.  Many have been scared out of a stock they once believed in.   Naked shorts have been ruthless in putting pressure on the stock making it go down further.   In turn, that has meant that the company has been forced to issue even more shares to generate the cash needed to keep the subscriber growth going and to support the business model until scale is ultimately reached.     So this has been a major bummer for the stockholders thus far.

I wanted to stay away from conspiracy theories – but just to whet your appetite – it is not hard to think of companies who might short this stock to make life hard for them.  There is a particular movie chain who desperately wants to see MoviePass dead, and there is at least motive for them to find ways to naked short sell the stock.  The company is owned by Chinese investors, and its initials are AMC.  If you are a shareholder, or MoviePass lover, next time you sit in an AMC theater, you might just think about how they are trying to kill your good times!

And so – yes dilution is real, yes it sucks for many of us, but there is a reason for it, and if it does ultimately increase valuable assets, as a stockholder, you will be fine.   It may take a year or more for the market to fully appreciate those assets, but when they do, you as a shareholder will by justly rewarded.

Little Bit of Disgust:  the definition of disgust being “a feeling of revulsion or profound disapproval aroused by something unpleasant or offensive”.    My feeling of profound disapproval at this point is targeted at Ted, and Chris Kelly, who continue to allow their egos to get in the way of settling what is now a long drawn out proxy battle for the company.    After I wrote the piece about this proxy battle I have now had multiple anonymous confirmations that my post was 100% accurate.  That indeed Ted and Kelly are fighting it out for control of MoviePass, and that they do indeed hate each other, and both are looking to take control of the company.   This has been incredibly bad for the company and for stockholders.  The big institutional money will not invest large sums in a company who is in a proxy battle.   It is nearly impossible to get any reasonable debt when in a proxy battle.   Further, it becomes a big day to day distraction on the business, while in its most crucial stage and needs focused management attention and execution.   I am disgusted by this, it is ego-driven, and does not help the company, the employees, or the shareholders.   It needs resolution, and these jackasses need to make amends NOW!

I am also further disgusted with Ted’s totally JV PR moves.  The latest being a tease of an acquisition announcement at Cannes that never materialized.   As most readers know, I worked at Microsoft for a long time.  I can tell you that it is basic 101 that you NEVER talk about a deal publicly before it is done.  NEVER – EVER – NEVER.   It is just so stupid that I can’t believe the CEO of the company made that mistake.   If you did that at Microsoft, you would be fired, seriously, your career would be over.  Of course, we can’t just fire Ted – but over time… maybe 🙂

Ted has shown that he is just crazy enough to get the financing to make this thing happen, but also too damn crazy to run this company to a sustainable multi-billion dollar Unicorn.   Maybe he can learn enough on the job to get over the hump.  But my sincere hope is that he does the right thing when the Proxy is resolved, and hands the company over to Mitch to run it, and takes a seat as Chairman of the Board.  Let Mitch do the heavy lifting.  He’s done it before.  Ted has done almost nothing – other than run companies into the ground, before.

So with all that, I remain long, upset with management, dissapointed with my entry point into the stock, hopeful that in a year or so, we will be seeing better days and higher stock prices.

 

 

Why Atom Tickets is the Perfect Acquisition Candidate for MoviePass – And Why I think it might just happen!

While we are all sitting around on pins and needles wondering what HMNY CEO Ted Farnsworth meant with his teaser quote in Variety when speaking of a”major acquisition, Farnsworth said,  “It’s going to be substantial,” said Farnsworth. “People are going to go, ‘Hmm how did they pull it off?’”

I am becoming increasingly optimistic that the acquisition is going to be Atom Films.  Which I think is a perfect fit for MoviePass, and for Atom films.   It is a synergistic combination, that will take both companies to a totally new level.

Why I would love this merger:

  • MoviePass has built an incredible brand with massive momentum.  Consumers love it and it is spreading with WOM in a fast viral way.  MoviePass is getting people back into theaters.
  • Atom Tickets has built terrific infrastructure and a very innovative social movie ticketing app and website and is now accepted at more than 19,000 screens across the US.  Including AMC, Regal and Showcase Cinemas.  Atom has created a “cool” frictionless way to go to the movies and has integrated concessions purchasing into the app, where consumers can pre-order concessions and have them ready and waiting at the theater.
  • MoviePass needs more ways to make money and needs a way to secure discounts on tickets purchased at the major theaters.   Atom Tickets can provide both of those things.
  • Atom Tickets needs more consumers, they have the Theaters signed up, but they have an audience problem.  Building that audience is expensive and hard.  MoviePass has audience, and they have incredible momentum building more audience.  Atom really can’t afford to go it on their own in this incredibly expensive space, they need a horse to ride to get their solution into more consumers hands.
  • MoviePass knows that they have a big Halo effect on getting people to the movies, but they have no way to monetize that – Atom Tickets could make that happen.
  • Atom Tickets has already started doing merchandising deals with Studios. For example, they ran a  “Legends Never Die” promotion, where Atom Tickets U.S. app users purchased advance tickets to see the Tupac Shakur biopic and could upgrade their order with a $25 limited edition merchandise bundle that included an official All Eyez On Me T-shirt, bandana.  MoviePass could bring a much bigger and more enthusiastic audience to these types of promotions.

Here is why I think it may just be possible.

  • Atom tickets CEO and Co-Founder  Amesh Paleja left the company to take the CTO Job at Starz –  and Atom has not named his replacement.    Believe me when I tell you, if things were taking off like a rocket ship at Atom, Amesh would not be leaving to take another job.  When a founding CEO leaves a company after a series C round, it means that the waters are rough for the company, and they are trying to find a way out of the storm.
  •    Some have speculated that it would be too hard to pull off this acquisition given the serious amount of financing Atom Tickets has pulled in and from big names including Fidelity Investments, Lionsgate, Disney and 21st Century Fox .   They have raked in a total of $125 Million, with the last round being $60 Million.   In their last round they said the money was to be used for Marketing campaigns and to continue to build out features of the service.   This is where it gets interesting, yes there is a lot of money dumped into Atom so far- and the $60 million was just back in early March.  Now I don’t know about you, but I have not seen much at all in the way of Marketing from Atom, in fact I have seen way more marketing from Fandango than Atom.   Here’s the issue.  Atom has a neat idea, and some cool technology.  The theaters are cool with them, because they see no real threat, and maybe a little upside to the way they do things now.  The problem for Atom is, they are just not that interesting to consumers.   Not compared to MoviePass, and they have to compete for consumers with the theaters themselves and with all the other ticket options.  As a standalone play, Atom is just not that compelling.   They can’t generate the WOM that MoviePass does, and while they have a fair chunk of change, it’s not enough to get them anyplace big.  Certainly not to an IPO.
  • So I think Atom is willing to deal, and I think the backers of Atom would be thrilled to find a way to get into bed with MoviePass, even if they have to take an initial small valuation haircut to do it.  Being acquired by MoviePass takes away a headache for the VC’s here, and it also works to the advantage of the studios – as ultimately they want what MoviePass and Atom want, to get more people to the movies.

Finally,  I have one last reason why I think this may be happening, and it has a lot more to do with what I don’t know, than what I do know, so to speak.  Read – this is NOT inside information!    I happened to have a contact at one of these companies where we could chat about these kinds of ideas and these things.  That contact has gone totally dark on me.  It may be that this person now knows that I write this blog and doesn’t want to talk anymore for any reason anyway.  Or any other number of reasons that this person doesn’t want to talk.  But I have a hunch this person is protecting me and  (she/he) to make 100% sure that no insider trading accusations could possibly be made.

It is just a hunch – and I could be wrong.   But I sure hope this is the news and acquisition Ted is teasing.    Time will tell!

My Updated Revenue Model Post 1st QTR Earnings Release

Many have asked for an updated model after the ER this last week.  This new model has a lot of tweaks to key variables, and I had to spend some time making the model fit within the specific numbers of the release.

Before we get to the specifics I want to highlight what I posted earlier this week.   The specific nitty gritty in the financials really don’t matter all that much for a company that is headed to unicorn status.   Subscriber growth and getting to scale are much more important in the phase we are currently in.  Mitch understands that crossing the chasm requires rapid and disruptive growth that can challenge and overtake the incumbents of the industry.

Many MoviePass investors have now seen this excellent presentation done by Mitch where he outlines how rapidly changing patterns of consumer behavior and the speed at which businesses with a new disruptive idea that reduces friction and increases consumption of a service can quickly grow into multi-billion dollar companies, seemingly overnight.    If you have not watched this yet – and you invest in MoviePass – you owe it to yourself to check it out.

There is a fun part of the video near the last 7 minutes where Mitch takes a shot at AMC, stating they will buy them and change their name.  I love it!

The point here is that if you are investing in MoviePass / HMNY and you think you can peg the share price to very specific models like mine, or anyone else’s model,  forget it!    Mitch and our boy Ted are moving way to fast for that.   Whatever you read today in my model, could change with a major move tomorrow from the company.   A new family plan, an acquisition, getting a big hit from American Animals or Gotti, or some other film.   It all moves to fast to model and tweak in the single-digit percentages.  And that is why if you get all hung up on ER’s and all the bean counting with company’s like MoviePass, you will simply get lost, or run over by the train.

Now – while all that is true, there is a business to run, and there has to be enough money around to fund the big ideas and give investors some real hope that this thing won’t just bleed cash in eternity.    Ted and Mitch have consistently said they could near profitability at the 5 Million Subscribers mark, saying that would happen sometime near the end of this year or early next year.   So with that promise from management, and the need to not party like it was 1999!  Here’s a model that can make some claim toward progress on getting to profit.  And by profit – I do mean gross profit, not net profit.  If you don’t know the difference, you should not be buying individual stocks.

To make this model work I had to take in the following data from the ER into my model.

  • Subscribers 2.7 Million (They were not specific on this, but I believe that is the very latest number and is a May number) 1.1 Million new in the QTR – I could not fit this into the model.  It actually didn’t make sense with the numbers they have been quoting along the way.  So this is something that is just broken in the model – that said, it’s not critical to the outlook and I didn’t have time to figure out why they net addition numbers just did not jive with other sub #’s they have stated.
  • Revenue 49.4 Million – Ad revenue  1.2M – I got close here
  • COGS 137M  –  I got close here
  • Utilization rate – Dropping to 1.5 on average – THIS IS BIG and it was largely missed by many.  (quick rant – HMNY is HORRIBLE at PR – I mean they are terrible, the worst I have seen, even for a startup.  So bad that it makes me question who they have working on this and why they don’t just hire me to help them with it.  In this specific case of ER – they released all the 10Q numbers in the evening and followed up with a poorly written Press Release the next morning. (NO COMPANY EVER DOES THAT!!!!)   Even worse!!!  They did a terrible job highlighting the most important new data they had in the release, and that was the super significant reduction in Utilization rates with the new rules and fraud protection now in place.   For some reason, they included an excellent graph of monthly cohorts in a multimedia format and had no serious efforts at comments or explanations of the graph!   Many investors would not even see the graph as those things typically do not show up in most trading platforms.   I mean really, everything about how they execute their basic PR is just amateurish /rant )

If you don’t understand cohorts, and have not studied this kind of thing, it ain’t no big deal.  The graph simply looks at what a group of users, based on certain months as the cohort, would look like before and after the changes.  You can see here, the drop in Utilization is BIG, and on average it drops down to a 1.5,  That’s very good!  And I expect to see other – smaller – drops in the future.  Both form more anti-fraud measures, and from the user base maturing.

OK!!   so I worked all of those factors into this new model.   And with all of these new numbers baked in, it actually looks quite promising that MoviePass could still get very close to breakeven

Also for the first time, I added a row for SG&A – I took the $20 Million they reported in the QTR and smoothed it upward monthly.   SG&A is a funny thing to play around with, it is largely a variable, and can go up and down based on a lot of management decisions.   It is a small part of the puzzle for HMNY, but it was a little bigger than many of us wanted to see, given the company has claimed it does not need to spend money on advertising.   No matter, it is real money, and it does need to be watched.   And if this were not a product that sold itself, it would need to be watched very carefully.  Many subscriptions businesses spend 100’s of dollars per acquired customer.  MoviePass spends Much less than that.  It is now closer to $55 in SGA per Subscriber.   That is not “Nothing” anymore.  And if it goes up a lot more, that is new problem to start looking at.   It would mean that our WOM marketing is starting to slow.  We don’t want that – so get out there and tell your friends about MoviePass every damn day!

OK here’s the model.

And as usual – all my models are on this page.

 

Final comments and caveats – I don’t get paid to do any of this.  If you hate the model – that is fine – you are welcome to build your own!

I do apprectiate comments and suggestions.  So keep those coming.

I know MoviePass consumers like to get a lot of bang for their buck.  So I hope this gives you some solid friction free advice you can use!

Lastly – I had two nice glasses of wine writing this post, so if it rambled, and got loose at the end, that might help explain it!

A Proxy Battle and a Clash of Egos is Now Holding Back HMNY & MoviePass Stock

Chris Kelly – Original MoviePass Investor

A clash of titans and silicon valley egos is colliding and it is taking down HMNY stock price and could possibly take down the MoviePass ship altogether if not resolved soon.

As Ben Rabizadeh stated in his article on Seeking Alpha last month.

“there is only one news event which can permanently put a bottom in the stock and turn things around; that is resolution of proxy.”

Ben’s words could not be truer today as we sit at .65 cents a share hoping for a miracle.

I wanted to know, what is going on with the Proxy – what happened to our IPO moment and this huge potential opportunity of MoviePass.   I have been digging and digging on this, I have reached out to multiple company officials at both MoviePass and HMNY neither will comment.

I have been in contact with other investors who claim to have contacts who know what is going on inside the proxy battle.  I want to fully disclose that I cannot disclose the sources I have, nor can I fully vouch for these sources given they feel it necessary to either stay totally anonymous and or they will not reveal their own sources.    That said, I have spent many hours on this, digging through SEC filings, reaching out to past employees of MoviePass, talking to investors long and short about the situation.   Here is what I have found.

Apparently, there continues to be a disagreement between Chirs Kelly and Ted Farnsworth on how to resolve the proxy.  For those not familiar,  Chris Kelly, who was Facebook’s Cheif Privacy Officer, was the lead investor in MoviePass’s Series A round financing.    Chris has had a past of getting special concessions out of Farnsworth and HMNY since the beginning -when the odd relationship was formed with Ted and Mitch to bring MoviePass and HMNY together.   If you go back to the old SEC filings at the beginning of the HMNY acquisition of MoviePass you can see that Kelly was able to carve out special concessions from Farnsworth.  Likely because Kelly did not trust Farnsworth because of his shady past.   The following comes from the original Share Purchase Agreement:

(b)          Subject to the terms and conditions of this Agreement, Helios agrees to purchase at the Closing and MoviePass agrees to sell and issue to Helios at the Closing, such number of shares of MoviePass common stock, $0.0001 par value per share (the “Common Stock ”), equal to fifty one percent (51%) of the then outstanding shares of Common Stock of MoviePass (on a fully-diluted basis, giving effect to the payment or conversion of any notes that convert into MoviePass capital stock that are outstanding immediately prior to the Closing, but excluding any outstanding options to purchase shares of Common Stock and warrants to purchase shares of MoviePass’s capital stock and the shares of Common Stock issuable upon conversion of the Kelly Note (as defined below)) for an aggregate purchase price of up to $27,000,000 (the “ Maximum Purchase Price ”), payable as provided in Subsection 1.1(c) below.  The shares of Common Stock issued to Helios pursuant to this Agreement (excluding, for the avoidance of doubt the Kelly Conversion Shares (as defined below)) shall be referred to in this Agreement as the “ Shares .”  MoviePass further agrees that upon conversion of the Kelly Note by Helios in connection with the Closing, it will issue the shares of Common Stock issuable under the Kelly Note; provided, that in the event that the number of shares of Common Stock to be issued thereunder is less than two percent (2%) of the then outstanding shares of Common Stock of MoviePass (on a fully-diluted basis, giving effect to the payment or conversion of any notes that convert into MoviePass capital stock that are outstanding immediately prior to the Closing, but excluding any outstanding options to purchase shares of Common Stock and warrants to purchase shares of MoviePass’s capital stock and the shares of Common Stock issuable upon conversion of the Kelly Note), MoviePass hereby agrees that the Kelly Note will be convertible into such number of shares of Common Stock to provide Helios with the foregoing two percent (2%) interest under the Kelly Note (the shares of Common Stock to be issued under the Kelly Note, the “ Kelly Conversion Shares ”).

This clause has all kinds of interesting stuff in here.  But one thing is for certain, Kelly had a loan to MoviePass, that was convertible to shares, and it looks like both parties were suspicious of each other and naturally trying to protect their own interests.  What is notable is that Kelly was the only special case noted in the entire agreement with Helios and the only outlier noted  in the SEC filings.  Kelly has some sway with now things go with MoviePass and HMNY.

Mitch Lowe and Ted Farnsworth

Culture Clash of Titans

Kelly and Farnsworth could not be more different.   Kelly is a lawyer, who has made it big and has a stellar reputation.  You don’t get to be the Chief Privacy Officer at a company the like of Facebook without having your reputation totally in hand.   Kelly is now a major VC investor, Pro Sports team owner, and silicon valley royalty.  He runs in all the right circles and knows all the right people.

Farnsworth is a huckster and a hustler from Miami. He has burned shareholders with several wipeouts in the past.  His most notable achievements were the psychic network and his total faceplant with purple energy drink, a company he tried to create to compete with Monster Beverage.  He claims Highlander Companies – a Miami Real Estate venture targeting millennials in his SEC Bio – but an exhaustive search brings up nothing about the company.  Farnsworth is the kind of guy that Kelly would normally eat for breakfast.  Kelly apparently has no respect for Farnsworth at all, and likely regrets that he has to deal with in any capacity.

Mitch Lowe stands in the middle of these two guys.  Mitch’s reputation stands strong being associated with both Netflix and Redbox, but big hits and winners for Mitch.   However, Mitch is a super unique type of entrepreneur, he is a high school drop out, he started off with an oddball business selling movie blacklight movie posters in Europe.  He is not your typical blue-blood silicon valley, Ivy Leaguer, MBA.  Mitch has real street cred, but he does it his own way with grit.

When you bring these kinds of personalities together, I can tell you from experience – these big egos clash – big time.  That is what is now happening behind the scenes at HMNY and MoviePass.

IPO vs. Reverse Merger Who Wins What?

Retail investors shouldn’t really care very much how the Proxy is resolved, we just want it resolved and fast.  The benefits of removing the Proxy status are many.  It provides MoviePass better and cheaper access to more capital, it makes it much easier to sell the story of the company, and it clears up a ton of brand confusion with HMNY that just continues to linger.   It is one of the primary reasons that the stock price is getting killed, and the dilution of shares is happening on the cheap right now.

Kelly wants a MoviePass IPO, it is not exactly clear why he wants this, but it is easy to speculate.  Kelly likely believes that the company is undervalued, and he wants to see a bigger return on his original investment in the company.  It is impossible to know how many shares of MoviePass Kelly currently holds, but he is for sure one of the biggest holders of the company left in the cap table, and he wants to maximize that holding.  Kelly and original MP investors only have the remaining 8.2% of the company left to bargain with.  In many ways Kelly likely regrets giving up as much of the company he has, knowing that they have the potential to go big now.   Further, it is likely that Kelly wants to have a bigger say in the company’s future, he likely does not want Farnsworth in his way or in his company.  Kelly likely wants a seat on the board, and some other board members with him that align with his way of thinking.  An IPO helps Kelly with his ego – which apparently he has a very large one.  He wants MoviePass to be his trophy, not Farnsworth’s.

Kelly allowed Mitch to do a deal with the devil in Farnsworth, to finance the big $9.95 go for scale play.  None of them had any idea at the time that they were going to strike lightning in a bottle the way they did when the offer was first introduced.   The surge of subscribers took on a life of its own and caught the company and its investors totally off guard.   This is why the company suffered so many growing pains so quickly, from blackouts, to customer service problems, PR glitches and all the rest.  They just were not ready to be instant rock stars.

You only have to look at to SEC filings of the Share Purchase Agreement,  to understand that the goals put forth were blown away by a factor of 10  in a matter of one month.  Even Mitch commented in his video interviews they thought they would get about 100,000 subscribers in a year, and they were way over that in a month.   So yes – they were all caught off guard.   Except maybe less so for Mitch – who was always the advocate for lowering the price and driving the business to big scale.

 

Closing; provided however , that 666,667 of the Helios Closing Shares shall be subject to forfeiture by MoviePass if MoviePass fails to achieve either of the following two milestones within the specified time frame: (A) within one year after the Closing, subscribers to MoviePass’ MoviePass product shall have exceeded on at least one (1) day 100,000 subscribers (such number of subscribers to be determined based upon the number of registered accounts on the MoviePass server that have contracted with MoviePass (through a 3 rd party or otherwise)

With that huge hit of momentum, Farnsworth has felt emboldened by the big bet he had made, and he wants to take total control of MoviePass.  Farnsworth’s desire is to try and take out Kelly and the remaining MoviePass stockholders 8.2% stake out on the cheap.   They now have far less say on what Farnsworth can and can’t do with the company.

To do it Farnsworth is taking another big gamble.  Instead of agreeing to whatever Kelly’s demands for an IPO likely with favorable terms for Kelly, Farnsworth is riding on like the cowboy he is.  He has essentially given Kelly the finger.  Last week’s 8K and the continued dilution to raise money to fund the MoviePass subscriber growth is Farnsworth’s way of saying, “Hey Chris – I can do this without you now, you can either give in now or give in later”.  Farnsworth is not afraid to roll the dice here and force this go his way. By selling more shares in HMNY he is, in essence, diluting down Kelly more as well.   Yes, this hurts the stock price, and it even hurts Farnsworth by hitting him in the pocketbook, Farnsworth is the largest shareholder of HMNY, and he has a bonus structure heavily tied to the market cap of the company, which he is now wildly far away from achieving.

It’s a dangerous game being played by two big egos fighting for their right to control the next big unicorn company.  Unfortunately, retail stockholders are caught in the middle.  Ted is pressing on, diluting shares for more funding, and pushing to be the leader of the band.   Kelly has bunkered down and is trying to find a way to get his IPO.  What we don’t know is what other cards Kelly might have to play if any.  For now, Kelly can just refuse to sell his shares to Farnsworth for a reasonable price, holding up the reverse merger and all the goodness that could come from that.  If Kelly has any other cards, we don’t know but I am sure we will soon find out.

When this is resolved, the buy signal will be on.  It will remove a key blocker for big money managers to invest in the company, it will allow Farnsworth to get debt financing at much more reasonable terms.  Getting debt right now is extremely difficult due to the proxy fight, nobody wants that kind of a legal headache.

I will keep digging here, if you know more please share it with me.  As retail investors, we should put the fire to these guys push them to resolve their differences so we can all prosper!

 


For Reference SEC Filing on MPSA

MoviePass Subscription Agreement

 

Background

 

As previously disclosed, on August 15, 2017, Helios and Matheson Analytics Inc. (“Helios”) entered into a Securities Purchase Agreement with MoviePass Inc. (“MoviePass”), which Helios and MoviePass amended on October 6, 2017 (collectively, the “MoviePass Purchase Agreement”). On December 11, 2017, pursuant to the MoviePass Purchase Agreement, Helios purchased shares of MoviePass’ common stock, par value $0.0001 per share (the “MoviePass Common Stock”) totaling 57.8% of the outstanding MoviePass Common Stock (excluding shares underlying MoviePass options and warrants) after giving effect to the transaction (the “Acquisition”).

 

As previously disclosed, on October 11, 2017, Helios and MoviePass entered into an investment option agreement (the “Option Agreement”), pursuant to which MoviePass granted Helios an option to purchase additional shares of MoviePass Common Stock in an amount up to $20 million (the “Option”). From November 2, 2017 through December 15, 2017, Helios exercised the Option in full. Upon full exercise of the Option, Helios owned 62.41% of the outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants).

 

Helios previously announced the closing of the Acquisition in a Current Report on Form 8-K, filed on December 11, 2017, containing the audited financial statements of MoviePass for the years ended December 31, 2016 and 2015, and the unaudited pro forma combined financial statements of Helios and MoviePass (which Helios amended by filing a Current Report on Form 8-K/A on February 9, 2018).

 

As previously disclosed, on March 8, 2018, Helios and MoviePass entered into a Subscription Agreement (the “March Subscription Agreement”), pursuant to which, in lieu of repayment of $55,525,000 in cash advances made by Helios to MoviePass from December 19, 2017 through February 20, 2018, MoviePass agreed to issue to Helios and Helios agreed to accept, based on an agreed $240 million pre-money valuation of MoviePass, an amount of MoviePass Common Stock which, when added to the amount of MoviePass Common Stock owned by Helios immediately prior to entering into the March Subscription Agreement, caused Helios to own 81.2% of the then outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants).

 

New Subscription Agreement with MoviePass

 

From February 27, 2018 through April 13, 2018, Helios provided cash advances to MoviePass to support MoviePass’ working capital and operational requirements, as well as to support the expansion of MoviePass’ business plans and objectives. The total amount advanced by Helios to MoviePass during this period totaled $35,000,000 (the “Advance”).

 

On April 16, 2018, Helios entered into a Subscription Agreement with MoviePass (the “April Subscription Agreement”), pursuant to which, in lieu of MoviePass repaying the Advance, MoviePass agreed to issue to Helios, and Helios agreed to accept, based on an agreed $295.525 million pre-money valuation of MoviePass as of March 31, 2018, an amount of MoviePass Common Stock which, when added to the amount of MoviePass Common Stock owned by Helios immediately prior to entering into the April Subscription Agreement, caused Helios to own 91.8% of the then outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants).

 

Accordingly, as of April 16, 2018, Helios owns 91.8% of the outstanding shares of MoviePass Common Stock (excluding shares underlying MoviePass options and warrants). MoviePass has no class of shares outstanding or designated other than Common Stock.

 

 

 

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