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!

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.

 

 

 

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

 

The post Seeking Alpha won’t let you see!  

Seeking Alpha would not let me post this to my blog on their site.  They sent me back the below note after I submitted the post.  While I know I will not win any future financial author awards, and also I realize I make the occasional grammar errors, I didn’t think my stuff was that bad.  With this stock, I actually know a lot about these types of businesses and have worked in this space for over 20 years. So I find it funny they won’t even let me post a blog posting on my blog about it.  I guess they think I am a pumper, or maybe they don’t like my ideas, or maybe they don’t like that I link to competitive sites. Who Knows? I have now had a few blog posts that Seeking Alpha has refused. I will continue trying to submit occasional things to Seeking Alpha – but with all my future stuff I am just going to post here on my own blog.    

 

Dear Bob Visse,

The blog post which you submitted has been declined for publication, since Seeking Alpha is a website which is focused on finance and investing.

If you’d like to submit another blog which is more suitable for our audience, we will review it accordingly.

Thanks for your cooperation.

Best wishes,

Seeking Alpha Moderation team

 

I think it is funny that they claimed my post was not suitable for their audience. Let me know what you think after reading it.  And I do appreciate anyone who takes the time to read it!  Even if you think I am a total nut job whacko!

Full disclosure:I have maintained that I am long on HMNY since I started writing about them about a month ago.  

 

So Here’s the Post Seeking Alpha wouldn’t let you see!  🙂

I think it needs to be said at the outset of this post, Moviepass is a very young company, and really does not yet deserve to be a public company at all.  Also it is important to note, this is in fact true- Moviepass IS NOT a public company! It receives investor attention like it is a public company, however due to its unusual and now hotly debated proxy ownership 80% ownership by (HMNY) Helios & Matheson.  But don’t forget, Moviepass is a private and still early stage startup.

In almost every way Moviepass behaves much more like a very early stage startup than it does a public or more mature company. If Moviepass was a well funded early staged company backed by a group of deep pocketed venture capitalists it’s unlikely we would see or even care about its every move to the extent that retail investors do.  However, this is what makes (HMNY) and MoviePass such a fascinating story for retail investors.  It is rare that a retail investor can participate in the sausage making of a new internet scale business and have an opinion, and even a share vote along the way.

MoviePass did something this week that no public company would ever do.  They removed their core product offering from the marketplace, and basically said nothing about it in their PR.  This major product offering change was buried in the small print of a new promotional offering launched with partner iHeartRadio.  The company made no effort in their PR to make it clear that this offer is now the exclusive offer being made from MoviePass.   The company has also made no announcement about how long this offering will be in place and when if ever the unlimited plan might return. They have only stated the new offer is for a limited time only.  Searching around on the MoviePass website, I can find no specific details as to when a customer will be able to buy the “unlimited” $9.95 –  1 movie per day pass again.

You have to think that management made a conscious decision to eliminate what has been MoivePass’s core product offering, the offering that created a major stir in the industry for the past several months!  The unlimited offer is what put the MoviePass brand on the map – and now poof it is gone?   And creatively it disappeared with a new bundled offer that restricts the number of movies to just 4 tickets a month.  

Moviepass’s promotional material places a $120.00 value to the new promotion.  That seems like an odd value to place on what would have previously cost a MoviePass customer only $30, the cost if a customers were to buy 3 months of the old, and more valuable MoviePass subscription, at $9.95 X 3 Months.  

I am not claiming that the new offer is not valuable, it clearly is a great deal to get 12 movie tickets over the course of 3 months for $29.95 and you get 3 months of iHearrtRADIO with it to boot.  But it is not the same value proposition as the unlimited offer, and it is the first clear signal that Moviepass is ready to move away from the publicity stunt of unlimited use, and move to a more sane but clearly valuable offering for consumers.

This is a significant development for Moviepass (HMNY) investors.  For those who have followed both the bull and bear thesis of this stock, we all know that utilization rate is a huge and complicated issue for Moviepass.  In a long interview with recode’s Peter Kafka Mitch Lowe has explained how Moviepass envisioned how the company could be profitable with an offer that seemed to good to be true.  Lowe said

“Here’s the trick: 89 percent of American moviegoers only go to four or five movies a year. When they join MoviePass, they double their consumption and go to about 10 a year. That’s a little bit less than one a month. They balance out the 11 percent of the population that go 18 times before joining MoviePass and then after go three times a month. It works out. Over time, it actually works out to be about one movie per month per subscriber. Now, some people do go to 10, 15. We even have one guy who on this 40th birthday challenged himself to go to 40 movies in 40 days. We do have people with a fair amount of time on their hands.”

This has been Moviepass’s story on how they can make this offer work over time.  If they get enough people who are only casual moviegoers, they can offset the heavy users, who are like those people who load up at the buffet every single day.

Moviepass has up until now been willing to lose money on the heavy and unprofitable users because of the incredible word of mouth marketing they have provided for the service.  Mitch Lowe and Ted Farnsworth the CEO of Helios & Matheson have both consistently claimed great subscriber growth with zero marketing. This was all made possible because of the incredible value of Moviepass combined with people spreading the word of that value to friends and family – because who doesn’t want to tell you about a great deal they are getting!  This story has been amplified by the media, who loves a story about disruption, and particularly loves any story about a media company who is disrupting something as old and storied as the theater. Getting PR for this kind of story is as easy as bringing ants to a picnic. There is nothing the media loves covering more than media. So Mitch and Ted got a TON of free PR for this offer and were featured all over the business and media landscape with their new crazy offer for moviegoers.

Moviepass has entered the collective conscience of the consumer mainstream.  Some even call it a movement.  Here are a few stats to share on the burst of popularity of Moviepass.  There are 22,800 Videos on Youtube on Moviepass, everything from how to use it, how do they make money.   A Google Search on Moviepass now brings up over 4 Million results. A Google News search results in over 155,000 results.  There are facebook groups, meet ups on meetup.com, large and active reddit.com threads, instagram groups and more.   It is an amazing accomplishment for a small company that has spent almost nothing in marketing.  

But here’s the secret, there was a cost to that marketing, and that cost of marketing is now obvious, it was buying all that free publicity from passionate theater goers – the cost of sucking up to all those heavy MoviePass users who in turn told all their friends, who told their friends and so on.   There is no more powerful force in Marketing than word of mouth, and MoviePass bought a truckload of it! 

This is a classic marketing trick used by many upstart brands.  Find your passionate audience, get them hooked, make them your fan, get them to recommend your product, add fuel to that fire.  Moviepass played this very well, and now it looks like they have taken this play far enough and may be ready to begin the process of cashing in on that momentum.  

Think drink tickets now.  Its still fun and a good value – but the party is winding down…

The good times can’t go on forever!  Moviepass is about to reign in the fun on all those who are getting too drunk at the hosted bar. The new offers will look a lot more like drink tickets at your company party.  You can have a few drinks at a great value, but don’t get all crazy, and if you do want to go all crazy, you can pay for that yourself!  

This is a risky but necessary move, and it will likely take some time to pull it off. MoviePass has now shut the gates to the all you can eat deal.  They don’t sell it anymore. That doesn’t mean they will NEVER offer it again, but they are certainly testing the waters here.  That is the message Moviepass is giving with this new deal with iHeartRadio deal being their exclusive product offering for the company.   

The next step toward profitability.  Have you read the fine print in Moviepass Terms of Service?

There is a document that you agree to when you sign up for Moviepass called the Terms of Service.  By you using the service it states that you agree to the terms of the document. All software and services companies use these, and they are enforceable and legal.   

The Moviepass Terms of Service agreement is a doozy.  It is setup in a way that Moviepass could go instantly be profitable with a stoke of pen – or a keyboard.   Let me explain.

First as I already stated, all Moviepass customers have agreed to these terms and conditions, and they have written in protection from any class action lawsuits residing from changes to the agreement.  So not even an angry mob can do anything if they don’t like changes that may come down the pipe. Moviepass is in complete control of every aspect of the offering. That includes pricing, the number of movies you can see per month, the theaters and the actual movies that Moviepass customers can see.  Below is the specific clause

2.4. MoviePass reserves the right to change or modify the Service or subscriptions at any time and in its sole discretion, including but not limited to applicable prices, at any time, without prior notice.

MoviePass reserves the right to change the rules of movie-going attendance and ticket availability to members in connection with the Service at any time. MoviePass reserves the right to change from time to time the number of eligible movies a member can see per month. MoviePass reserves the right to offer members a new price option if they exceed watching a certain amount of movies per month.**

So you see, Moviepass has very thoughtfully crafted a Terms of Service agreement that puts them in total control of the service.  Not only can they limit the number of movies you can see with the pass you have already purchased, they can raise the price any time they like, and they even have a clause specifically targeted at those heavy users.  “MoviePass reserves the right to offer members a new price option if they exceed watching a certain amount of movies per month”.  I think this clause says a lot, they will likely launch a new plan and price for heavy users, it will be a good deal, but not as good as before.   Then they will move forward with a more sane 4 movies a month plan for ordinary customers.  I think that is a perfectly fine deal, albeit not nearly as exciting as the old offering.

This move to change the core value proposition of MoviePass is not without risk.  I personally signed up for the MoviePass deal because I was so intrigued by the unlimited concept.  It was easy to understand, it seemed to provide a crazy good value, and after all it was offered from my favorite store (COST) Costco!  I trusted the Costco brand far more than MoviePass, and I would have never bought the service or found out about this stock if it were not for that promotion.  The trust of Costco Brand with the incredible perceived value of MoviePass was a one two punch my little consumer brain could not resist!

The risk of moving away from the all you can eat unlimited deal for MoviePass is that people will start to do a lot more mental math. They will think harder about how many movies do they really see today, do they really care about committing to x# of movies per month.  It could give customers a reason not to buy it.  I don’t think that will happen though, NETFLIX had at various stages had different #’s of CD’s you could have at certain time when it started out, and the pricing tiers were different.  ATT and Verizon both had unlimited data schemes and ratcheted them back.   There are now enough people using MoviePass that if feels “real” to consumers.   And MoviePass can still offer a terrific deal to the 80% of customers who now only go to the movies 4 times a year.   

Unlimited is an exciting offer and people are irrational in now they make purchasing decisions. When they hear and think unlimited, they see a lot of value, even if they don’t use it, they could! And for many that is enough to get them to take the deal.  Now that the MoviePass name is becoming well known, and Theaters accept it widely, Moviepass does not need to offer unlimited to get the word out nearly as much as they did.   Of course, if MoviePass moves away from the unlimited deal more completely, the PR and free promotion will dwindle.  So that is a risk that they have to thread the needle with very carefully.  It is why this iHeartRadio promotion is so important. 

For now, they have turned off the spigot, and that is a BIG MOVE for this small company.  If they can thread that needle to keep enough existing customers happy, slowly wean off the over users, and add plans that work for the broader base of moviegoers, this company could have a very bullish future.  

Mark Gomes – One of MoviePass’s biggest bears wrote and video casted that the big moment to reconsider MoviePass and HMNY stock is when they make a move to reduce their cash burn and take control of their utilization rate.  I think we have now witnessed that pivotal moment.

Wisely I think, MoviePass did not come out and broadly with PR or advertise this significant change in their product offering.  Like a Trojan Horse – they snuck the new deal into the market where nobody was looking, and slyly snuck the old unlimited deal out of existence. (at least for now).  We will know more soon on what their future plans and offers may look like. I expect there to be more movie # limit caps on most if not all new offers going forward.  If MoviePass does a deal with Verizon, which I fully expect to happen, you should expect the offer will also have a cap limit on # of movies per month similar to 4 limit with the iHeartRADIO deal.

This will be another exciting week to watch for HMNY – Hope you call come back and read more of my posts!