I Have Not Given Up on MoviePass

I know that many have now totally given up on MoviePass and HMNY stock.   I completely understand why, with the stock being almost totally wiped out now, and relentless shorting and uncertainty facing the company, it is hard to blame folks for feeling that way.   Even for me, the committed 5 year long, this has been a remarkably unpleasant ride to take.

For me personally, I feel much worse about recommending the stock to people than I do about my personal losses.   Again, I limit all individual stocks to less than 2% of my portfolio, but losing 2% is NOT fun, and it is made much worse knowing others lost money on my recommendation, and I do truly apologize for that loss and my poor timing here.   Truly if you lost money based on my recommendation, I apologize.

Now with that out of the way,  I thought I would share why I still hold out hope for the MoviePass and HMNY.

I am going to start with the worse case scenario, not that I think it is imminent, but given we are closer than I would like to be, we have to start thinking more about what is the asset value here if any, and how would you think about that.

I am not going to get into potential suitors for the assets in this post.  There are quite a few companies that might find MoviePass an interesting target, and there are likely several private equity firms who might want to take a chance with it.   The silver lining of HMNY not being able to secure significant debt is that stockholders should actually get some value out of whatever liquidation plan might come to pass.

There are a few different assets one can think about here and contemplate their value.   In order of value, I think they have the following key assets.

  1. Subscriber Base
  2. Revenue Run Rate
  3. Total Online Audience including Moviefone
  4. Technology & Patents
  5. Mastercard – Billing relationships

I am not suggesting that you can separate out these assets and sell them piecemeal.  Rather, I think it is useful to think through what the company has built over the past few years, and how these different pieces can be thought of in terms of value.   I will take a crack at each piece here, and of course, the mileage will vary on these types of valuations based on lots of variables.

Subscriber Base – This is the core asset of the company at this point.  Everyone knows that this is a unique and slightly stressed asset in this case because MoviePass is losing a lot of money on these subscribers every month.  Of course, MoviePass has taken significant measures to reduce the cash burn, but it is yet unclear how successful this has been and we won’t know for sure for a few more months.    The important thing to note here is that MoviePass has up until now been making the conscious choice to spend money to build up their user base by spending big money to offer an incredible too good to be true offering.    MoviePass I believe has all the levers it needs to drop the hammer, and turn the subscriber base to break even anytime they want.  That would result in some significant churn of the subscriber base, but I believe MoviePass could raise their price,  and combine it with surge pricing and get to breakeven very quickly.   I think they could easily raise the price to $14.95, continue with Surge pricing, and that would get them very close to breakeven.    I think the worse case scenario on churn- if they did drop the hammer -would be 33% of the base would leave, and many of those, probably greater than 50%  or more would be heavy users who cost MP money anyway.    A move like this would still leave MP as a great deal for most consumers, and they would likely also continue adding new customers who were not all caught up in the emotional baggage of change.

So with all that, I think MoviePass could easily have 2 Million Subscribers at breakeven @ $14.95 a month – or $180 a year.  That would give them $360 Million a year in monthly subscriber revenue and easily another $40 Million in Surge Revenue.     So $400 Million in breakeven revenue, with likely still very high growth rates.   That is a valuable asset – no doubt about it.

Take Spotify for example – they claim it takes 12 months of premium subscriber months before they break even on their acquisition costs.  Interestingly they use their free “ad-supported” service, as their acquisition vehicle to get their premium subscribers.  This is NOT that different than what MoviePass is doing.  The big difference, of course, is MoviePass is essentially doing a promotional price as their core offering to juice up their subscriber count.   Knowing that they eventually would raise prices and do variable pricing via surge pricing.   If you calculate the customer acquisition costs of Spotify premium users it ends up being at least $25 bucks a subscriber, however many people argue it is much higher.  They don’t disclose it.   But let’s just say that $25 is the number.   And for the sake of argument lets say that a Spotify premium customer acquisition is equal to a MoviePass customer acquisition.   That would mean there is a $50 million asset right there.   This is not the LTV of the customer, but simply the asset customer acquisition activity.   That is already above the current market cap of MoviePass.  So that makes no sense at all.

You can start to do all kinds of new calculations with scenarios where MoviePass stops the bleeding and even makes some money on subscribers.  You can come up with LTV (Lifetime Values) by taking the ARPA (Average Revenue Per Account x estimated Margins / over churn to come up with reasonable values.

I can easily model out scenarios that give $40 to $60 LTV’s assigned to a smaller more profitable MoviePass subscriber base, which again would get you to well over the today’s total market cap for HMNY.   Here’s a good example of how people think about it for Spotify.

The point of the all of this is that the market is irrationally assigning an extremely low value to the MovirPass subscriber base.  It is assuming that MoviePass will not see improvement in COG’s via more theater deals, and it is also assuming that MoviePass can’t raise prices without causing too much churn to their base.    I think both of those things are NOT true – and that MoviePass will end up both reducing COG’s and increasing revenue while churning out many of their worst customers.

Revenue Run Rate –  I have mentioned this before, but it is worth repeating it here.  It is damn hard for companies to find 1/2 Billion in Revenue.  And there are a LOT of companies that want to show revenue growth and would love to have an asset of reliable revenue growth at these levels, even if it were only breakeven for now.   If you talk to any CFO who knows how to dress things up for Wall Street, the street wants 2 things.  1- Growth 2-Profit.   There are companies out there sitting on decent profits but zero or negative growth.   They might even have some fat left to cut to get more profits from their existing business, but still, they can’t find the revenue growth.   MoviePass could add instant revenue growth, with the promise of more profits later down the road.   That is a very attractive component of the potential valuation of MoviePass.  Big Revenue Matters!!!    Trust me on this one.  Every CFO knows that profit improvement without growth is NOT good for their stock.  Just look what happened over at Netflix today.  Growth slowed!  They got slaughtered!

Online Audience  MoviePass has a unique situation with it’s online audience, it is now both large and very active.  The Moviefone acquisition helped grow the audience to around 10 Million people.   MoviePass so far has not done a lot with this asset but it can and I think will do much more over time.  Some have tried to compare this only audience to Facebook ARPU numbers to downplay the value of the audience.   It is a longer discussion, but in short, that is a very bad comparison.   Sites that have active users who are considering a valuable transaction are much more valuable than sites that have users who are doing all kinds of things on social media.  We called it the value funnel when I was working at MSN in Microsoft.   The closer you are to getting a person to do something that is transactional, the more money an advertiser will spend on your site to get that user.   So in the case of MoviePass & Moviefone, most users are very close to buying a movie ticket and going out of their homes to spend money in the very near term.   That has real value.   I think the audience value alone here, without the subscription side of the business is easy $7 -$10 Millon dollars, and I think that is very conservative fire sale type of price for that asset.

Technology & Patents  There is definitely some value in the tech and Patents here with MoviePass.  There is an active lawsuit underway with Sinemia to that effect.  I have written on the value of the patents already.   Please check that out.   If we get to the scaping the bones of the patents – we will be in very bad shape.  So I won’t go all crazy trying to say that this alone will save the stock, because it won’t.  But there is very real value here.

MasterCard Billing Relationships.  I am calling this out because of the unique way in which MoviePass is implemented, it requires that every subscriber has a MasterCard to enable the movie ticket transaction.   As subscribers, we all get this and know how it works.   It costs debit and credit card issuers approximately $200 to $300 in acquisition costs to sign up a new cardholder.  Think about that for a couple minutes.   Every single MoviePass one of MoviePass subscribers has a debit card issued to them, it works like any other debit card, but it is backed by a customer credit card that MoviePass has on file.   MoviePass has done something extraordinary here.   They have created 3 Million new MasterCard holders, who they can now bill for things at will (they customers will that is).   Is it worth $200 per sub?  No – but it is certainly worth $20 in a fire sale.   That is $60 Million in value all day long.  Again more than MP Market Cap valuation today.

Love or hate surge pricing, it was certainly easy for MoviePass to implement it against the payment vehicles they have on file with their customers.   Customers only had to download the new app and accept the new TOS and that was it!   They now had the ability to start charging customers for incremental transactions made with that MasterCard.    Now, think how easy it is going to be for MoviePass to add things like movie merchandise to the experience.   Think of the offers!   Just watched Incredibles – how about a cool T-shirt, action figure, lunch box. coloring book etc etc.     The amount of transaction revenue that could be generated from this MasterCard is very significant, and I see the market giving it essentially zero value.   That is irrational.

So in conclusion, I am really bummed out about the irrational negativity surrounding MoviePass and HMNY stock.   I am sorry for my bad timing and even more sorry to those who followed my lead into this stock and lost money.

But I have not given up on the company or the stock.  There is a significant set of assets here, and there is real value in this company, even in the worst of fire sale situations.   The stock is now priced so low, it makes absolutely no sense, and it is foolish to beleive that the management does not have options to unlock the value that has already been created.

I am not recommending that you buy more stock in HMNY, but I am also suggesting there is more value here than the market is giving to the company.   We went from irrational exuberance to irrational pessimism.

The market tends to be rational over the long term and very irrational in the short term.   I am hoping for some level of rationality returns here.

<<<agian – I do not recommend any single stock to represent more than 2% of your portfolio, and I recommend you keep the vast majority of your money in low-cost index funds over individual stocks.  Please don’t send me messages saying I ruined your financial life based on my advice – because quite frankly if you had followed my advice this year you would be up overall in the market>>>

 

 

 

 

MoviePass Valuation Comparisons to Other Unicorns

After watching this most recent YouTube video of Mitch Lowe being interviewed specifically on details around MoviePass’s ability to survive, I kept thinking to myself how ridiculous it is that the valuation for HMNY is so incredibly low.

As the interviewer points out in the video.  MoviePass is essentially priced like a company that is going out of business.  Mitch does an excellent job defending the value of MoviePass.  If you have not watched the video yet and you invest in MoviePass/ HMNY, I highly recommend viewing it in its entirety.  At one point in the interview, the guys both get real and fully acknowledge there is some real value in what MoviePass has accomplished to date.  It is damn hard to get 3 Million people to hand over their credit card and say “bill me” every month for a service.   There are a LOT of companies that will find this group of consumers very attractive.   So if it comes down to is there value here, in the case of potentially an acquisition, the answer is clearly YES!

Also, it was clear, that if MoviePass wanted to turn profitable in a hurry, they certainly have to the means to do it now.  Mitch revealed 12% of the MP users represent 40% of the cost.  With Peak Pricing now coming, it will be fairly easy for MoviePass to essentially kick heavy users out, or tax them to a point where they are no longer a problem.   As I have said for a long while, MP has all the levers it needs to control its own destiny, and it seems clear that they are intent on doing so.

It has been such an odd situation to watch the value of HMNY/ MoviePass drop so low while other private and public Unicorn companies continue to raise money via VC capital and debt financing,  And do so at incredibly large valuations.   I felt like it would be a worthwhile exercise to look at some well known Unicorn companies and compare some key data points.  These companies share a lot of similarities, they are building disruptive new business models at large scale, they are competing with entrenched incumbents, they are spending capital and incurring losses to build these new businesses.

The numbers here are a little rough, I scoured the web to get as accurate as I could, and because all of these companies are growing very fast, and they are either private or just recently public, it is hard to get precisely accurate data.   I think what I have here is reasonably close for each company, and it works well for comparison to MoviePass.

If you look at the comparisons what will jump out to you is a few things.  First, the market is currently valuing MP at almost nothing, it is assuming MP is going out of business.  As I have said before and will say it again, MoviePass is not going out of business, and they are NOT going BK.  Second, while it may sound scary when we here about the need for potentially over $1B more of capital to get MoviePass totally off the ground, by comparison, MoviePass has built a great revenue stream on relatively little capital thus far, way less than many other Unicorn companies.   And the total expenditure of capital is certainly not out of line with others who have market caps that are very generous.   There is also the constant fear of dilution that overhangs the company.  Will they really need to issue a billion shares or more, swamping the demand side?   It is possible that these fears, even if irrational, and only temporary could continue to depress the stock until the company shows a more clear line of sight to breakeven, or the sentiment for the company and its stock improves.  Those two things could be integrally tied together as well.  Only time will tell.

When looking how far the comparisons to other Unicorn diverge, it doesn’t make much sense, and I fully expect to see some revision to the mean here.   By that, I mean that I fully expect to see MoviePass move up closer to the valuation of other Unicorn companies within some reasonable timeframe.  I believe that this will likely happen toward the end of this calendar year, or sometime into the spring of next year.    I am not predicting any specific price, and this reversion to the mean could take longer.   However, I firmly believe the market is rational in the long term, and these great divergencies won’t continue.

Of course, you could also argue that these Unicron companies themselves are seriously overvalued, (many do believe so) and we could see valuations move more toward MoviePass.   I don’t believe that is going to happen, at least not in any major move.  This is different than the old Dotcom blowout of the 2000’s, these are real companies, and they are creating real value in what they do.   It is the incumbents who need to worry more than any other group.  Old firms like Merrill Lynch will be disrupted by new entries like Robinhood.   Taxis and other transportation companies will be disrupted by companies like Uber and Lyft.   Theater chains like AMC will be disrupted by MoviePass.  etc etc.

Here is the link to some interesting data and comparisons looking at ARR’s, VC Funding Totals, Accumulated Loss Estimates, Market Cap Evaluations and a few more things.   Take a look yourself, and ask yourself, shouldn’t MoviePass be worth more than a single Costco store?

If you don’t want to click to the sheet – here is a embedded one.  Sorry I could not get the formatting to work perfectly.  Again, you get what you pay for!

HMNY Naked Short Selling – What is it? Why it is Bad, And How Investors Can Fight Back

It is well known that HMNY has had a historically very high short interest, I have written about this a lot here, and how it’s expensive to short this stock.   I am not against short selling generally (however I personally never short stocks as I am not comfortable with uncapped losses) it serves a purpose in the market, and in some cases can provide needed increased liquidity for certain shares and market transactions.

I am however very against Naked Short Selling -with the intention to manipulate a stock price downward.   For those who don’t know what Naked Short Selling is – it is defined as.  “the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale.”

So if you are already familiar with short selling, which is –the sale of a stock that the seller does not own. The seller makes such a sale by borrowing the stock in order to deliver it to the buyer.   The obvious big difference here in Naked short selling is the seller has not borrowed the stock needed for delivery when it is time to cover.   Traders can use Naked Selling to manipulate the price of a security by selling more shares into the marketplace than there are shares available to cover, thus putting heavy selling pressure onto the stock.

Naked Short Selling for the purpose of manipulating a stock price is illegal, and I believe it is immoral.  First I will talk about the illegal nature of it.

The SEC has made it clear in their ruling on SHO regulations “abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited.”   You can’t be much more clear than that, it is absolutely against the law to manipulate a stock to depress the price of a security.   There is no wiggle room on that ruling.

Now on to why I think it is immoral to attack a stock with naked short selling.  In America, we are trying to build new companies, to innovate with new technologies and new business models.  We lead the world across many industries, our technology, and our innovation as a nation is the envy of the world.  Many are trying to replicate, but none of have been as successful as the great old USA in terms of building long-term wealth and prosperity through hard work innovation and commitment to building new and better industries. This land of opportunity we live in, the rising tide that has lifted the boats for so many of us in this country, it relies on fair market and trust.   I believe it is wrong, immoral, and frankly unAmerican, to try and crush a company and manipulate its stock price for personal gain.

Unfortunately, I believe HMNY / Moviepass, has been a victim of Naked Short Selling to manipulate the stock price lower.  Before I get into that.  I want to talk about an example of where this has happened in the past, and how a brave CEO fought back against it.   I say he was brave because you must understand, it is very hard for a CEO to fight against the machine of Wall Street.  If a CEO turns on Wall Street, they know that it could likely be very detrimental to their company and their career going forward.  You don’t bite the hand that feeds unless you are very brave indeed.  It takes a real whistleblower mentality for a CEO to fight for what is right above what might just be good for him, or even his company.

Overstock CEO Patrick Byrne was just the type of CEO who was willing to fight against naked short sellers.  His story is amazing, and it highlighted that great difficulty and expense involved going after the Wall Street machine.  Way back in 2004 Byrne was upset with what he felt were vicious attacks on his company and his stock.  Byrne filed suit in California and even managed to get laws passed in his home state of Utah limiting large volumes of naked short selling and fining brokers who did so up to $10,000.00.   This, of course, infuriated Wall Street, and accusations back and forth intensified and lawsuits multiplied.  Wall Street continually poured cold water on Byrne, claiming he was a poor leader, and should not focus on short selling, but on running his business better.  Byrne claimed that big firms were spinning phony negative research through nefarious 3rd parties while making it look independent, all while naked short selling the stock, manipulating it downward, so they could profit from the fall.

Ultimately, Byrne settled all of the cases against the big brokers, the largest settlement was with Merrill Lynch who paid $20 Million dollars to end the misery.  Here’s a fantastic snippet from the Press Release Overstock issued when finalizing the settlement.  ”

“Overstock.com feels the fight was well worth the effort.  Bringing this conduct to light has caused useful changes in the way the SEC regulates close-out requirements for stock trading. In short, Overstock believes the effort has helped reform the US Capital markets and lessened the opportunities for illegal stock manipulation.

Commenting on today’s settlement, Overstock.com CEO Patrick Byrne said, “Lao Tzu wrote, ‘In war’s victory keep to funeral ceremony.’  Though I am under no obligation to say so, I want to make clear that Bank of America had nothing to do with the behavior documented in this case. Even with Merrill Lynch, the individuals at issue are no longer employed there. I do not feel like bayonetting any more of Wall Street’s wounded today. Because we fought long and hard to get so many of the documents public, the true story of this decade-long battle can and should be told by an objective journalist. Res Ipsa Loquitur.”

Later, in an interesting twist, Goldman Sachs was fined $15 Million dollars by the SEC for not actually providing borrowed shares their customers thought they were receiving, thus putting Goldman’s own clients unknowingly in a naked short selling situation.  Goldman ultimately was settled out of the Overstock case.  If you want some very entertaining reading on the subject read the Press Release here.

Now mind you, there were plenty of Wall Street brokerages who loathed Overstock and their CEO for all this trouble and mischief caused by Byrne.  It cost both Overstock and the brokerages lots of time and money to deal with all of this fighting, and there really was no clear winner, other than maybe the lawyers who got paid a ton of money.   But the point here is that if we want or expect our boy Ted and HMNY to start fighting Wall Street, you can forget about it.   Ted needs Wall Street big shots one heck of a lot more than he needs retail investors to be happy.  Ted might be mad as hell about the short selling & naked short selling going on, but there is little he can do, he certainly doesn’t want to fight the same fight Byrne did.  Not only is it a big distraction, it costs lots of money, and the fight pits you and your company against Wall Street for years down the road.  So that just is not going to happen.

Now, why do I think that HMNY has been a victim of Naked Short Selling and manipulation?  Well, for the lawyers here or fans of law movies, we have the classic means, motive, and opportunity.

Who is my suspect?  Well, it is AMC of course!  AMC wants MoviePass dead, and while that may seem stupid idea for AMC, this is more about control of American consumers from an old-time puppet CEO in Adam Aron, who does not want to see a challenger company disintermediate his theater and come between AMC and the consumer.  MoviePass has already begun that irreversible disruption, and Adam is fighting mad.   It has been nothing less than all-out war with AMC, with Adam taking the unusual step for a large company CEO of blasting MoviePass at nearly every opportunity, even on AMC’s earnings call, even when AMC had clearly benefited from MoviePass related increases in attendance and sales revenue.  So motive is established and clear – AMC wants MoviePass dead!

Does AMC have the means to manipulate HMNY stock?  You bet they do, AMC is owned and controlled by Wanda group, Aron downplays the Chinese connection, but the facts are clear -AMC is a Chinese majority owned and controlled company.   In fact, the last 2 Board Chairmans have been appointed by Chinese company Wanda, and Adam Aron, is really just a bit of a stooge for Wanda, running the US AMC, while bigger things are happening back in China.

The newest Chairman of the Board for AMC is John Zeng, Zeng is also the President of Wanda Film Group, Zeng is the Chinese conglomerate’s most senior executive in charge of all film-related activity. That includes Wanda Cinemas, Wanda Films and the Qingdao Movie Metropolis in China.  So, yes, AMC is Chinese owned and run.  Aron takes his orders from Wanda.  There is no doubt about that.

Now back to the means.  Wanda has two very large backers, and in a  “you can’t make this stuff up” kind of way, one of them is none other than the Chinese government, and the other is Alibaba!  That’s right, AMC is actually owned partially by the Chinese government, let that one sink in just a bit.  The pockets behind AMC are let’s say, as large as the mother earth itself.

Now, do you think for even a minute that the Chinese like to play fair when a little startup American company is starting to mess with one of their investments?  History proves that China will do what it has to do to protect its interests.   Yes- AMC has the means to naked short sell HMNY into oblivion should they want them dead, and we have established already, AMC wants MoviePass dead.

Now, onto the opportunity.  Just because AMC wants to kill AMC, and would love to see the company stock shrivel up and die, and they have the money to do it, is there really any opportunity for AMC to make that happen.  OF COURSE THERE IS!

Naked short selling really is very loosely monitored by the SEC.  As you have seen with the Overstock story, even if a company suspects it is happening, they are reluctant to defend against it, because they don’t want to risk pissing off Wall Street.  Further, short sellers have very little reporting requirements.  Have you ever noticed it is almost impossible to find out who is shorting a stock and how much?   To make matters even worse, institutional sellers use something called dark pools, which are trades handled outside of the major exchanges to conduct short selling arrangements where there is total lack of any transparency.   And of course, the big firms like Goldman and Merrill are complicit in all of this, because they don’t care if they can make some quick money off doing a short sell deal, even if they neglect doing their part in providing the borrowed shares.  (Note: I am not saying GS or Merill is doing this here, just using them as examples).   So, the opportunity to commit the crime is there, AMC could easily utilize institutions, dark pools, and even offshore traders to execute all kinds of crazy short selling activity.   They could do it through connections via Wanda, Alibaba, or the Chinese Government.

So there you have it, Means, Motive, and Opportunity on manipulative naked short selling.   AMC has them all at their fingertips and has been unusually vocal about it.  What or who could stop them from carrying it out?  The SEC! ha fat chance! They are slow, understaffed, and have nobody complaining to them about it anyway.   

Unless… We long shareholders of HMNY start to complain.  We are the only party in this mess who can fight back!   We have nothing to lose, and everything to gain.   Not only does it serve us longs financially to get the SEC off their butts and start investigating this debacle.   It is our moral duty as Americans to fight against the evils of naked short selling, trying to destroy American industry and ingenuity!   To not complain to the SEC about this would be – well – downright unAmerican!

So I urge you go to the SEC website, fill out their complaint form, they have a specific area in the form identifying naked short selling, let them know you stand against this, and if you have lost money on it, let them know that too!  If they hear from enough of us, they will act!

Heres the link to file your complaint https://www.sec.gov/tcr

Let’s fight this together.  Do it for your pocketbook, do it for your country! Do it for your children!   FIGHT BACK!

 

 

 

 

 

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”

A Detailed Revenue Model On How The MoviePass Business Can Succeed

As a former GM of Product Management for Microsoft I spent countless hours creating and reviewing complicated revenue models for large scale businesses.  Revenue models bring together all of the various revenue opportunities a unit/company expects to see.  The model makes assumptions for every aspect of the business – pricing, sell through, inventory, growth rates, competition, conversion etc etc.   They are complicated beasts – so complicated in fact a model with just slightly different assumptions can create radially different results and viewpoints of a business’s feasibility .

At Microsoft revenue models typically have multiple reviews, every assumption is talked about, tested wherever possible, debated by the best and brightest at the company, and finally submitted to executive management. The models are then used for funding specific initiatives for things like headcount, marketing budgets and other costs related to executing against a business plan.  The revenue models are eventually used by the company to make estimates for Wall St. on future revenues and earnings.

I spent more than 20 years in the sausage factory where these models are created debated and reported.   I can tell you with certainty, these models consistently have less than 50% accuracy.  All models have politics, specific agendas and bias baked into them.  The truth in models is almost always somewhere in the middle of the most optimistic assumptions and the most negative assumptions.  It is important to know when reading any model, what is the agenda of the person who created that model?   Is he/she looking to secure funding?  Is the person looking to kill the business because they would prefer some other initiative to succeed?   What does a person have to gain or lose if their viewpoint of the model is accepted as the “truth”.    I have witnessed many a Machiavellian business leaders purposely input wildly implausible assumptions into models to serve their own purposes and to advance their own personal fortunes.  It happens all the time.

I felt like it was important for me to introduce a new revenue model for HMNY investors to consider as the only detailed model currently floating around the web is the one published from Mark Gomes.  Gomes has been a consistent basher of MoviePass stock, he spreads a message of fear uncertainty and doubt about the company.  He has maintained that the company will likely end up a penny stock based on the business model and the need for continued capital needs that will come from dilution at bad terms.   I have reviewed Mark’s model (link below) and I believe it is both flawed, and contains some radical assumptions that would not be accepted by any experienced product manager or finance executive who has actually worked on a product like MoviePass.

In my model for MoviePass  (Link Below) I show how MoviePass can achieve profitability by the end of the year, as predicted by Ted Farnsworth CEO of MoviePass multiple times in the past.   My assumptions are relatively conservative across the board, and they align to the major assumptions that have been shared from Mitch Lowe (CEO MoviePass) and Farnsworth and they are outlined in the notes of the shared spreadsheet.   To create the model it is necessary to pull together public comments from both of the key executives of the company, and to research other various sources.   It is no simple matter, but with some time and thought a reasonable view of the company can be put together.

I invite you to compare Mark Gome’s model with my own.  It may well be that the truth is somewhere in the middle.   I am as my readers know, very bullish on MoviePass, so my view may be too rose colored.   I can almost guarantee that Mark’s view is way too pessimistic.

Mark Gomes MoviePass Model

2 Major Assumptions from Mark’s MoviePass Model of where I disagree include:

  1. Mark has a very radical assumption in his last two months of 2018 where Utilization Rate (# of movie tickets per month per sub)  jumps to 3.7 in November 2018 and  4.1  in December 2018.   Mark does this to account for high movie going season.   That would be acceptable if he dropped the rates lower in other months, but he does not.  That is likely not at all a realistic view of utilization rate and is estimated super high to make the cash burn look way worse.  It also does not consider new moves by the company to limit number of movies view on the new plans.  Mark even admits in his model that he uses a number of movies seen that “makes no sense” but was offered by Mitch and Ted, so he uses it anyway.  Mark has conflated some very important things here.  Mitch and Ted were likely including the “halo” effect that MoviePass has, where people bring friends and family members who don’t have a MoviePass.  At any rate, Mark cherry picks number here to make things look way worse than they likely will be for his November and December estimates.
  2. Mark assumes an $11 dollar Movie Ticket Price.  That is way above the $9 ticket rate reported by industry metrics.

Mark and I are reasonably close on other assumptions.  That makes sense, because utilization rates and ticket price are clearly two of the biggest factors in the models.  I hold my utilization factor constant at 1.4 movies per month – less than the 1.2 factor often used by Mitch.  I don’t factor in big seasonality jumps simply to show a simpler model, and because I believe subscription users are less likely to be as seasonal as normal movie going audience.   This is something I can adjust for later on as I fine tune the model.

Here is a link to the model.   I welcome your feedback, comments and thoughts.   I will be adjusting the model regularly as new information come available.   In summary, my model shows it is very possible for MoviePass to breakeven on a yearly run rate basis by the end of the year.  Meaning they could breakeven in 2019.

Bob Visse’s MoviePass Model