Long-time readers should note some significant changes in how I communicate in the public domain. The primary purpose of this forum is now to attract new contacts with professional industry expertise to share research and receive feedback (confirmation / refutation) regarding my investment theses.
Accordingly, this document should not be construed as an endorsement or recommendation of the companies or securities discussed herein. I am not an investment advisor and this is not an investment thesis. It is merely one part of the story, which I present for debate in hopes of determining all risks and upside potential. The disclosure at the end of this piece is critical to understanding the content of this document. Further, I frequently trade my positions and may buy, sell, or short the securities mentioned herein at any time, regardless of the facts or perceived implications of this article.
I answer lots of Q&A here. I’ve consolidated and re-worded the questions to accommodate most of what I’ve been asked. I answer a few regarding HMNY and a few regarding SMSI.
If you have any additional questions, ask them in the comments section below.
Are Shares Of HMNY Going To Zero? Not anytime soon, in my opinion. Bankruptcy generally happens to companies that are saddled with debt and can’t access the capital markets to resolve the issue. The second part of that statement (access to capital markets) may happen sooner than later (the 40% drop triggered by a mere $30 million round of funding is ominous), but the first part (debt) doesn’t apply.
One point that should be made is that a significant amount of sweat equity is being built up (albeit at the expense of common shareholders). If their big vision starts to look impossible, I believe management will be able to substantially scale back the business. It wouldn’t be big, but focusing on smaller theaters and lower-budget movies with usage caps could make them profitable / viable.
To be clear, I do not believe that such a scaled-down operation would justify a billion dollar valuation (much less a multi-billion dollar valuation). As such, it wouldn’t produce a good outcome for current shareholders, but it would keep the lights on.
The fact that management has this option quells the bankruptcy risk.
Are Major SMSI Shareholders Selling Millions Of Shares? ABSOLUTELY NOT. This is perfect case of “don’t believe what you read on the Internet”.
Smith filed a 424B3 (Registration Statement) to register shares that they recently offered as part of their fund raising efforts. This is standard procedure to effectively “make the shares official”, so they can be traded in the open market, like all other shares of SMSI.
If that filing was to announce that those investors were selling, I believe that the stock would have been down 20%+ instantly… but that’s not what that filing is for. The only reason the stock reacted at all is 1) people who didn’t know better and 2) fear mongers spreading fear.
I think it’s sad that SEC filings aren’t easier to read… but I think more sad when people pretend to know what they mean (or lie about it to scare other investors).
It’s true that those shareholders now have the ability to sell if they want, but I’m not concerned that many will (see below for the reasons why). Accordingly, I bought more shares after I saw the filing and the stock’s reaction.
In this case, here are the key things to consider:
1. When savvy investors sense a deal coming, many will sell a portion (or all) of their existing position, knowing that they can get it all back at a discount via the deal (you’re just not supposed to do this once you’ve officially been notified of the deal — it’s insider information). I myself have done this in the past and it works great (as long as they give you the full allocation of shares you request).
When investors don’t get their full requested allocation, they have to scramble to build / rebuild their position in the open market (I believe this recently happened to GAIA). This is why I (and many other investors) request more shares than I/we really want. If we get all the shares we order, we can simply sell the excess in the open market.
2. I signed an NDA relating to this latest deal back on Jan 31. From that point, it was over a month before SMSI’s deal got done. A one month lag is usually a recipe for disaster for the stock… and it was. The stock went from $2.50 to $1.50 over that time frame. In other words, some shareholders were selling all the way down, knowing that a deal was coming. For the record, I held my stake because I felt that selling would constitute an insider information violation.
3. I spoke with SMSI on Friday, April 20 and went over the key names on the investor list. I also did my own homework on them. I’m comfortable that most are either 1) long-term shareholders or 2) holding the stock to cash in on the Sprint deal and potential SMSI divestitures.
The notable exception is Hudson Bay who I’ve known about for some time. I’m not a fan of them and suspect (only suspect) that they were largely behind the recent selling and increase in short interest. The good news is…
4. In addition to the 750,000 shares that were shorted in March and the 3 million shares that traded in the three days following the deal announcement, SMSI traded 1.6 million shares last week. That’s over 5.3 million shares in total (nearly double the 2.8 million shares that were purchase in the latest round).
In other words, anyone who wanted to trim their position has had ample opportunity. Because of everything I’ve just said, I feel comfortable that most/all of the deal participants are close to the position-size they want to have.
5. Having said all of that, it really doesn’t matter (for two reasons). 1) As you might be able to guess by now, figuring out if anyone is selling — and how much they have left to sell — is nearly impossible. 2) A company is worth what it’s worth. Do I really want to delay buying a potential multi-bagger just because a few shareholders might be selling?
6. If anyone is selling a decent chunk of shares, it might be our final opportunity to pick them up cheaply/easily. As you can see below, there aren’t many shares left to buy. Listed shareholders own about 75% of SMSI’s common shares.
In theory, that only leaves 25% or roughly 4.7 million shares up for grabs.
But that doesn’t tell the whole story.
I know a lot of shareholders that aren’t listed below (including your truly). More than one would rank high on the list below (including your truly). Accordingly, my best guess is that there are less than 3 million shares that are really available to the public (plus, whatever shares might be being trimmed by the deal participants).
Three million shares is just $6 million dollars. That’s a very small effective float (which day traders love to jump on).
Based on the stock’s recent action, it’s fair to say that accumulating investors have outnumbered the selling investors in recent weeks. However, I expect a steady flow of investors to keep coming in. So, once the sellers are gone, the supply/demand equation could spark a major run in the shares.
|William Smith, Jr.||28%|
|Roy L. Rogers *||5%|
|Anson Investments Master Fund LP||4%|
|Hudson Bay Master Fund Ltd.||4%|
|Jon D. and Linda W. Gruber Trust||2%|
|Iroquois Capital Investment Group *||2%|
|Empery Asset Master, LTD *||2%|
|Empery Tax Efficient II, LP *||2%|
|BlackRock Fund Advisors||2%|
|Iroquois Master Fund Ltd. *||2%|
|Roy and Ruth Rogers Unitrust *||1%|
|The Vanguard Group||1%|
* Not repeat entries. Legally, these are separate entities.
What Are The HMNY Warrants Worth? To get a decent value-estimate for an option or warrant, just use a Black-Scholes calculator.
You’ll need to find the annualized volatility (vol) and the risk-free rate for the option/warrant’s duration. Annualized volatility can be estimated by using MarketChameleon and clicking on the Hist Vol MA (252) button.
The HMNY warrants expire in 5 years, so we can simply look up the 5-year Treasury rate. Then, simply go to the option calculator and fill in the blanks. The tricky thing about HMNY is that its volatility has been extremely skewed (it’s shown to be in the 140 – 160 range).
I don’t trade a ton of options, but in my experience, even volatile stocks only trade in the 40-80 range. So, I did two different calculations below. One using a vol of 50 and one using 100. FYI, I only used round numbers. If you want to calculate exact number, be my guest. It will be good practice!
From this, I estimate that that the warrants they issued are worth roughly $1.75 each.
The offering provided “units” (a share of stock + a warrant) for $2.75 per unit. Based on the warrant valuation above, the offering valued the stock at $1.00 per share.
However, investors probably looked at each instrument as something to discount. The warrants would have a steeper discount because they’re not liquid / can’t be sold. So, in reality, I would value the warrants at about $1, implying that the stock was sold at an implied value of $1.75 per share.
Either way, by buying the units at $2.75, participating shareholders could simply sell the stock (at about $2.40 yesterday). If so, that means that they only paid $0.35 for the warrants. They could then short the Jan 2020 $3 calls for $1.60, thus pocketing a $1.25 profit per share ($1.60 – $0.35 = $1.25).
In fact, about 7,500 of the Jan 2020 $2.50 calls have traded (which represents 750,000 shares of stock). So, seems like some folks have already been executing this strategy.
Is SMSI Getting Paid For The AAA/Sprint Free Promotion? I spoke with SMSI on Friday. They said that there’s a reason they “did a license with Sprint, instead of a traditional rev share”. In short, SMSI gets paid on a per-subscriber basis and Sprint gets the freedom to sell it, bundle it, and/or give it away any way they choose.
In other words, it doesn’t matter if the customer is paying for the service or not. SMSI gets paid a license fee either way.
Can MoviePass Put A Cap On Existing Customers? I’m not a lawyer, but I believe that such a move might bump MoviePass up against America’s bait and switch laws:
I would need to research this. Due to my schedule, I would appreciate if someone could take a crack at this.
In the meantime, know this — For what it’s worth, SMSI’s deal with Sprint hit a delay because Sprint wanted to switch customers from the old product to the SMSI product and raise the price by $1.00 per month. Sprint’s lawyers pushed back and said that they can’t do that.
My best guess is that MoviePass can not make a move like this easily and/or without serious repercussions.
FYI, demonstrating how slow (and dumb) corporations can be, it took Sprint 3-months to figure out that they should simply switch over to SMSI’s product without changing the price. This was the source of the delayed ramp. As I’ve said in prior posts, things are now back on schedule there.
Why Do Carriers Even Care About Family Location Apps? You don’t need to look any further than 9to5mac’s Thursday article on Q1 activations. The money quotes of the article were:
“At this point, the four major carriers are more or less just swapping customers between each other. CIRP notes that Sprint lost 24% of its existing customer during Q1, but gained the same amount from other carriers.”
“Combined with slowing growth in the overall market, it makes sense that Sprint and T-Mobile would revive their merger discussions. Both T- Mobile and Sprint individually grew well for many quarters, using aggressive pricing and novel marketing. After taking share from AT&T and Verizon, and also each other, it looks like they need to find growth elsewhere.”
As I’ve been saying for months, carriers are looking for ways to lock-in their customer base and find new ways to increase ARPU. Family-oriented apps have been proven to increase customer loyalty and revenue.
Clearly, Sprint needs this more than any of the tier-1 carriers, but it’s also clear (based on my due diligence) that all four are actively working on this situation.
Still Coming Up: Will SMSI Become A Ten-Bagger Again? I delayed the release of this report by a couple of days because of some new (bullish) information that has come in. Stay tuned…
- Sprint FINALLY Ramping Up SMSI’s Product!
- Videocast: AEHR 10-Q, MoviePass Update
- 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
To get my posts in real-time, just follow/subscribe to this free blog.
If you only want to receive my most critical reports, simply sign up for my MailChimp mailing list instead. If you’re on that list, you will only get key articles and occasional recaps of all the work I’ve recently done.
Disclosures / Disclaimers: I am XXXXX. However, this is not a solicitation to buy, sell, or otherwise transact any stock or its derivatives. Nor should it be construed as an endorsement of any particular investment or opinion of the stock’s current or future price. To be clear, I do not encourage or recommend for anyone to follow my lead on this or any other stocks, since I may enter, exit, or reverse a position at any time without notice, regardless of the facts or perceived implications of this article.
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.
I wrote this article myself, and it expresses my own opinions. I am receiving no compensation for it, nor do I have a business relationship with any company whose stock is mentioned in this article. The information in this article is for informational purposes only and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
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.