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.
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
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.