MAJOR UPDATE: MoviePass Hits 2.5M Subs, But 2018 Cash Burn Estimate Worsens To $700M

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I’m still trying to fully research & wrap my arms around MoviePass’ (HMNY) acquisition of Moviefone. While I do, several big things have surfaced:

1. Ted Farnsworth was on Fox News this morning (hat tip to one of our contributing readers #collaboration), He stated that they now have over 2.5 million subscribers and are buying 7%-8% of all movie tickets.

Of course, 7-8% represents progress toward gaining real influence over theaters. That could be good news for the company in the long-term. However, the data shows that this is bearish news for traders and common shareholders.

Specifically, I’ve updated my cash burn model to reflect Ted’s new disclosures (and the latest box office data). The good news is that box office receipts were lower than expected in March.

The bad news is that MoviePass’ ravenous customers don’t appear to care — they simply don’t take months off. While the movie revenue fell 33% in March versus February, MoviePass visits only fell by 21%.

Entering April, BoxOfficeMojo is expressing optimism regarding this month’s slate of movies, including Ready Player One, which got off to an impressive start last week. That’s not a good sign heading into the summer gauntlet.

As a result of all this, my 2018 utilization forecast has been increased.

I now expect that MoviePass will need every bit of the $100 million that HMNY raised (in mid-Feb) by the end of May. Worse yet, as I’ve previously warned, I expect the summer blockbuster gauntlet, to cause losses exceeding $180 million in June/July.

This means that MoviePass will need two more $100 million rounds of funding before July… and one more before the end of August.

As if things couldn’t get worse, the stock is acting even more poorly than my dilution model (see below — it clearly need to be updated) has projected. I expected the next round of funding to occur at $3.15 (with the stock trading at $4.50 beforehand).

As it stands right now, it doesn’t appear that the stock will reach $4.50 before then. With another round looming, short sellers are incentivized to short tens of millions of shares for the next two months. They can cover those shorts simply by participating in the next round of funding (presumably near the same 35% discount as the last two rounds).

Even at a 6% month cost to borrow (100% annualized), the 35% funding discount will more than compensate for the two-month of borrowing cost.

Of course, then the whole process will immediately start over in anticipation of the June and July rounds of funding. For those rounds, short sellers will only have to pay for one-month of borrowing.

Here’s how my original dilution model looked:

	Next Round	Round 2	Round 3	Round 4	Round 5
Pre-Deal Stock Price	$            4.50	$      2.68	$      1.59	$      0.95	$      0.56
Deal Price (w/warrants)	$            3.15	$      1.87	$      1.12	$      0.66	$      0.39
Money Raised ($M)	$             100	$       100	$       100	$       100	$       100
Shares Issued (M)	31.7	53.4	89.7	150.7	253.3
Post Deal Stock Price	$            2.68	$      1.59	$      0.95	$      0.56	$      0.34
Cumulative $ Raised	$             100	$       200	$       300	$       400	$       500
Cumulative Shares Issued	31.7	53.4	89.7	150.7	253.3
Total Shares Outstanding	121.7	143.4	179.7	240.7	343.3
Fully Diluted	163.5	206.7	279.3	401.4	606.6
Market Cap	$        735.71	$  553.46	$  445.03	$  380.50	$  342.11

…and here’s how it looks now:

	Next Round	Round 2	Round 3	Round 4	Round 5
Pre-Deal Stock Price	$            3.00	$      1.79	$      1.06	$      0.63	$      0.38
Deal Price (w/warrants)	$            2.10	$      1.25	$      0.74	$      0.44	$      0.26
Money Raised ($M)	$             100	$       100	$       100	$       100	$       100
Shares Issued (M)	47.6	80.0	134.5	226.1	379.9
Post Deal Stock Price	$            1.79	$      1.06	$      0.63	$      0.38	$      0.22
Cumulative $ Raised	$             100	$       200	$       300	$       400	$       500
Cumulative Shares Issued	47.6	80.0	134.5	226.1	379.9
Total Shares Outstanding	137.6	170.0	224.5	316.1	469.9
Fully Diluted	195.2	260.1	369.0	552.1	859.9
Market Cap	$        585.71	$  464.21	$  391.92	$  348.91	$  323.31

I remain hopefulthat the company will gain enough critical mass to achieve profitability in a couple of years, However, even if it does, current common shareholders are not positioned to benefit. Quite the contrary, in fact.

Needless to say, I remain bearish on the stock.

2. Evidence suggests that the reinstatement of AMC’s 10 highly-trafficked movie theaters did not come with any substantial concessions from AMC. AMC’s stance toward MoviePass remains dismissive and agitated that MoviePass execs are using the AMC name to attract PR.

Personally, I’m all for MoviePass using AMC’s name for PR. It’s part of why I credit Ted Farnsworth’s marketing prowess. Nonetheless, the notion that AMC didn’t cave in (at least not substantially) is a letdown for shareholders. The stock has already begun reflecting this by fading the initial move.

3. The Moviefone deal was mostly for stock and warrants. I think that was a smart move for them (especially since they locked Verizon up for 12-months). However, it doesn’t say much for HMNY feels about their valuation.

Let’s put it this way (to the bulls)… if you were Ted, would you be giving up any shares of stock at this valuation? Of course, the comeback to this is, “if they paid 100% with cash, they’d just be issuing more shares sooner.” and that’s a good comeback… but then, why not hold off a little longer on the Moviefone deal until your stock is worth more… unless you don’t expect it to become worth more. #moredilution.

4. In the Wall Street Journal yesterday… “Mr. Farnsworth said only 12% of MoviePass subscribers are “heavy users” and that it would be profitable excluding that segment. But since those heavy users are unlikely to leave. MoviePass seeks to make money other ways, including selling advertisements to studios that want to reach its user base.”

Depending on the definition of “heavy users” versus the industry’s definition of “frequent movie goers”, this is more bearish news. Frequent movie goers represent about 15% of the movie going population. Yet, MoviePass only considers 12% of its customers to be “heavy users”. This implies that we should not expect the ratio of heavy vs. casual users to improve anytime soon (posing a continuation of the cash-burning, dilution-causing MoviePass utilization rate).

Investors should keep a close eye on utilization and churn, assuming we’re blessed with any/further insight on either. My working hypothesis is that heavy users will renew their subscription (a no-brainer for them) at a much higher rate than casual users (whose decision won’t be as intuitive… especially if their usage moderates as MoviePass execs expect).

If my hypotheses plays out, we will see a greater proportion of new customers and renewing customers to be “heavy users”. That will increase the overall percentage of heavy users, offsetting any moderation in casual-customer utilization.

So far, the persistently high utilization (as updated by Mr. Farnsworth this morning), suggests that’s exactly what’s happening.

Stay tuned for more…

More Research:

• AEHR Grows 175% — Beats On The Top & Bottom Line (Buying More)
• GAIA vs. MoviePass: CAC Shows Which One Is A True Mini-NFLX
• Major Update on SMSI
• SMSI’s Safe & Found App: 100,000 Downloads & Counting
• MoviePass Projected To Burn $600M In 2018
• SMSI: Riding A New Trend & Making Its Latest Comeback
• Mark Gomes Research

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I am not a financial advisor. Nor am I providing any recommendations, price targets, or opinions about valuation regarding the companies discussed herein. Any disclosures regarding my holdings are true as of the time this article is written, but subject change without notice. I frequently trade my positions, often on an intraday basis. Thus, it is possible that I might be buying and/or selling the securities mentioned herein and/or its derivative at any time, regardless of (and possibly contrary to) the content of this article.

I undertake no responsibility to update my disclosures and they may therefore be inaccurate thereafter.  Likewise, any opinions are as of the date of publication, and are subject to change without notice and may not be updated. I believe that the sources of information I use are accurate but there can be no assurance that they are. All investments carry the risk of loss and the securities mentioned herein may entail a high level of risk. Investors considering an investment should perform their own research and consult with a qualified investment professional.

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The primary purpose of this blog/forum is to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.