FREE Q&A (Ask Now!) — Is HMNY Going To Zero? How Low Is SMSI’s Float?

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.

Cheers!

 

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.

Investor Common Ownership
William Smith, Jr. 28%
Unterberg Capital 10%
Thomas Satterfield 8%
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%
Peanut Bug 1%
Roy and Ruth Rogers Unitrust * 1%
Renaissance Technologies 1%
The Vanguard Group 1%
Totals 74.7%

* 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.

vols

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!

vols

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:

bait

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.”

and…

“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…

 

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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.

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52 thoughts on “FREE Q&A (Ask Now!) — Is HMNY Going To Zero? How Low Is SMSI’s Float?

  1. Changing terms if need be on existing MoviePass holders is probably not a big deal for those on a month to month plan as there is no long term agreement. They would just give the customer advance notice at which point you could cancel or accept. As for annual plans, that’s probably a different story but it’s actually not as big of an issue as the bulk of their plans are month to month anyway. So they have flexibility if needed.

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    1. Agree… but sending out a notice of such a change to 3M customers would surely cause a stir, not to mention slippage. One of the advantages of auto-pay subscription services is stealth. Many people renew month after month, not realizing (remembering) that they have a service they haven’t been using (thus, most affecting the infrequent/non-users.

      I’ll be very interested in seeing the non-renewal rate if/when that happens.

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      1. FYI – New survey on MoviePass out today by National Research Group says existing customers on average are willing to pay $15 a month, while new subscribers on average are willing to pay $20

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      2. I agree with this. The monthly plan changes would be fine and legal according to their terms of service. I’m no lawyer (I should ask my contact lawyer friend) but I don’t see how changing your renewal terms would be a bait and switch, happens with all subscription services.

        The best way to do it is to leave the legacy options at the same price but less features like Netflix did when they moved to UHD and more streams. Or again like Netflix you just bump the renewal rate up a couple bucks and no one cares.

        This would work great, not cause a PR nightmare and leave the aspect of “choice”. They could do this at any point and see immediate impacts to the majority of their subs. I personally would stay subscribed in any of those scenarios and likely choose the more expensive plan and I’m in the target demographic for Mitch.

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        1. Sprint ran into the same issue with their lawyers. They’ve been wanting to force switch to SMSI’s product (And apparently it’s OK to switch them to a better product), but they also wanted to raise the price $1.

          Ultimately, it took the bureaucracy three months to figure out that they simply need to keep the same old price and everything will be OK (and that’s what they’re doing).

          That was the main source of the delay that rocked SMSI’s share price 😅😡😭

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          1. Yeah I read that above but that is a completely different scenario. That would be like me switching my ISP and forcing me to transfer my Netflix subscription to Hulu, even at the same price you could still have a lot of upset customers. I mean I like the Handmaid’s Tale but that is about it.

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          2. I have the perfect resource with my contact lawyer friend, I’ll see if I can bug her about it 🙂 Buy her a beer and “oh by the way, could you look at this MP ToS agreement for me” 🙂

            Liked by 1 person

  2. Hey Mark,

    Thanks for the post, I think it answers a lot of questions retail investors has had over the last few days.

    On SMSI’s float; I thought float = total shares – restricted shares. Since the recent filing allows those folks to sell, shouldn’t you include their shares in your total float calculations; which would result in a much higher share count? I’m assuming after the filing, those 74% in shares held are no longer restricted and they’re allowed to sell?

    Please correct me if I misunderstood. Thanks.

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    1. Depends on your definition. Search for “SMSI float” and you’ll get many sites giving different figures.

      I use the term “effective float” which is the shares not locked up by large / strong shareholders.

      My assumption with SMSI, is that large shareholders are not going to sell a stock near it slow while it’s fundamentals are at the highest levels in recent memory. It’s proven to be a useful metric for me historically. Hope that helps!

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  3. First, thanks for your invaluable research on hmny and smsi.

    This is an old question but still has me perplexed. Do you have an idea why MP re-opened the 10 AMC theaters? You said the day it happened, it must mean a deal is happening. I think everybody believed that was the most logical reason. However within 2 weeks, Mitch was saying is was a test and now the test was over and Aron was back to trashing MP.

    I can’t make it work. There are so many obvious reasons to never open those without revenue share: it’s expensive, it’s their only bargaining chip, it goes against their new strategy of concentrating on middle America, AMC hates you…

    I’m mostly out of hmny(Thank God, you and storytrader). But all I can conclude is the management is complete idiots or there is a deal which has not been revealed. If its the later, I’ll keep my shares as is, possibly add below $2. But most days I just think: No, they’re just idiots.

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    1. The day it happened, I believe I said that NEGOTIATIONS must be happening. However, that same week AMC confirmed that was not the case.

      I’ve said this on numerous occasions, but the big theater chains hate MoviePass and want them out of business. They would rather eliminate this threat than receive revenue from them.

      I have also said that I believe movie pass can succeed, but the reality is that I believe they will fail. I will stop short of saying that Management is a bunch of idiots, but I will say that I believe that Management is not deep or qualified enough to accomplish what they’re attempting to do. In my opinion, there is no REAL qualified CEO or CFO involved. Just a very good COO and CMO. Cheers.

      Liked by 1 person

    1. 😂😂😂 Mitch has been an unmitigated disaster. From the anti-dilute to DataGate, he’s been a mess.

      Further, I have shown that his contributions to Netflix and Redbox have been grossly overstated in public.

      I’m not saying that it’s impossible for him to pull it together, but there is no evidence that he has any ability to lead this company to success, and has therefore earned/deserves no benefit of the doubt.

      There’s no benefit to doubt 😂

      Liked by 1 person

  4. I have to say, because nobody else will, the title of this column “My Shorts” doesn’t exactly make me rush to look, and I don’t believe you didn’t know that when you posted, you’re too sharp

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    1. I did. I almost named it “Eat My Shorts”. Also considered “Look at my shorts”, “Check out my shorts”, “Cover my shorts”

      When the market corrects and bottoms, definitely “Dropping My Shorts”.

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  5. Hi Mark,

    I have done some additional work on SMSI and like the opportunity. In your prior SMSI writings, you have discussed the primary competitor’s inferior offering. Do you have any updated thoughts on their ability to improve their software and, therefore, increase the likelihood they retain the other big telcos. I hate customer concentration but recognize that in the telco space, there really is no alternative. I am willing to accept that risk if I think the reward is there, which it clearly will be if SMSI’s chances of winning one or more of the Big 3 are good. Thanks.

    Eric

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      1. Thanks for confirming. I couldn’t find anything that had changed so bought some more assuming a large holder must be selling off some extra shares.

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  6. Would you mind doing a follow up on matr? And maybe a bear/ devils advocate case attempting to justify the current smsi valuation? I think these two articles would help me understand the research process better. You have written some wonderful and convincing stuff on a few real duds in the past, it would be informative for me to better see the risks now that I understand the concept of looking at the possibilities.

    Also, have you ever looked at ostk? Any estimate for the potential value of the t0 platform they are working on? With your background, I think you might be uniquely positioned to evaluate this tech and the impact it might have.

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    1. FYI, MATR got acquired this AM. Management never got their act together. Sad!!! The acquisition validates the technology and potential, but $NICE will take over and be the ones to finally unlock the company’s value. Weak ending to that story.

      The SMSI bear case is the same as any other of my picks… management execution. Companies like ATTU and QADA did what they promised and their stocks tripled (and have kept going). Companies like MATR and others failed to execute on their plans. The key is to track the progress and make sure they’re making PROGRESS.

      Most companies encounter delays, but that’s fine as long as the issue / excuses get fixed (even if it’s one by one). ATTU had a few big issues, but fixed one every quarter. The stock responded. MATR had the same 🤬 issues every quarter. No progress.

      So far, SMSI has been more like ATTU 😊 Sprint has confirmed this. We’ll keep a close eye to see if it continues.

      I’ve followed OSTK, but also avoid it. Nice business, but never liked management or the hype. It was a “Great Find” last year, but they are now firmly in Wait Time phase, which takes longer than people think (and drives the stock down). Would rather be short than long. May actually short a little today.

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      1. I saw the sale this morning. it stinks. I lost more than I would like to admit on it due to (wisely?) scaling in as it dropped. One of my investing character flaws is the inability to sell my losers. I used to think I just had excellent patience.

        anyway, I bought OSTK about a year ago when T0 looked like it would be functional. I considered it a “speculative” pick, a lottery ticket maybe. I agree we are in wait time now and I sold most of my position already at a significant gain. I do wonder if the price appreciation was linked more to the rise of bitcoin than anything else OSTK intentionally did. I always thought the retail business was probably destined for mediocrity or failure. Mr. Byrne is a little out there, but if he stumbled on a great idea, I thought that might not be a bad thing. I guess my big question for you, do you think T0 have the potential to be a transformative business for OSTK, or is it mostly hype? For a layman like me, it seems superior to current exchanges and I could imagine it being acquired by one of the big exchanges if so.

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        1. I think mostly hype, but I could be wrong.

          Good comment about the price of bitcoin. Of course that played into things, but I would say that crypto currencies are also now in wait time as a group.

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          1. That’s a great question.

            The deal will not close until the second half of the year. So, people who pay $2.65 today won’t get their $2.70 for several months.

            So, you are essentially getting paid about 2% to hold onto the stock for a few months. Of course, there is the risk that the deal falls through, so that has to be calculated in to the equation.

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  7. FYI – it looks like MoviePass unlimited plans for new customers may be gone for good:

    The new offering, which also includes iHeartRadio All Access (normally $9.99 a month), is being called a “promotion” and is temporary, though in an interview with The Hollywood Reporter, MoviePass CEO Mitch Lowe said he doesn’t know if the flagship, ticket-a-day product will ever return.

    “Do you think you will go back to a movie a day?” THR asked Lowe at CinemaCon in Las Vegas late Wednesday. “I don’t know,” he responded.

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  8. Mark, when are you going to follow up on the SMSI comments on the insider shares/float, looking forward to a new article on SMSI. One reader commented about Mr. Smith owning 28%, I just briefly looking at some of the filings it looks like most of this is preferred that hasn’t been converted yet, pending a vote by the shareholders at the annual meeting to remove the 19.99% limitation on ownership?

    Liked by 1 person

    1. To be honest, I’m not worried about details like that.

      The point is, he has a substantial amount of his capital tied up in this company and added substantially to it with money out of his own pocket.

      From there, it doesn’t matter what percent his ownership is. It’s “substantial”.

      As for my next piece, “soon”. 😉

      Like

      1. And still none announced in the Top 10. The Top 10 have more than 60% market share. The Top 3 have 50% share (and Canaccord’s model calls for MoviePass to sign 45% of all theaters).

        It’s simple math — MoviePass can NOT succeed without strong penetration of the Top 10, including at least one of the top 3.

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    1. That is right in line with my model says… but that all changes tomorrow.

      The summer gauntlet officially begins!

      ☠️☠️☠️☠️☠️☠️☠️☠️☠️☠️☠️☠️☠️

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  9. 1) U had them burning 23mm in April, while Ted just said its 12mm – 13mm (hence your forward months probably need adjusting too), 2) I’m not sure accounted for 2,000 exhibitors giving them a discount as that’s double and your model held in constant in April vs Feb/March, 3) Your % of tickets MP sold shows 6.5% in Mar/April and 7.1% in May and sounds too high compared to what was officially reported to the SEC in their YE report that also highlighted data up to March at 6.1% of tickets…

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    1. 1) April isn’t over and the potential biggest blockbuster of all time opens tomorrow. April has had only three weekends so far and has still done $368 million.

      I see the Avengers matching Black Panther’s $240M Fri-Mon opening weekend. So, I see April ending at about $700M, nearly double the month to date total.

      This will increase the month to date loss from $9M to $33M.

      The model is there… all you have to do is change the numbers to see that. #analysis!

      2. The additional exhibitors were recently signed and just started producing revenue. Further, I am assuming that these are mostly 1-3 screen theaters (the norm among non-Top 10 theaters until the Q1 numbers show otherwise. Again, just do the research!

      3. My model was/is almost dead-on compared to the data you just cited. The numbers in the model have been provided BY MANAGEMENT through mid-April. I haven’t taken any guesses on those numbers.

      Conclusions: There’s a reason I’ve been right about HMNY. 🤷🏻‍♂️ It’s NOT because I’m smart or making lucky guesses. I’m doing the research and throwing the numbers into the calculator. Same as I’ve been doing for the past 25 years.

      I can’t help it if other people aren’t willing to do what it takes to make the right decisions.

      p.s. Thanks for sparing me. That comment just needs to be copied and pasted to produce my next post. 😊

      Like

      1. I’m trading & making dough in the $2.50 – $3.50 zone, buying on dips & selling on rips while slowly building a core long/term position – so my decisions have been good to me so far! Eventually I hope to go very bullish and move to a large long term position, but I’m not there yet… As for the math, we can compare notes when they file their Q1 2018 earnings, which should add a summary for the full month of April as they like to add more current details, so we can see how this plays out on record when they report.

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  10. Mark – Work with me on this one for a moment. MoviePass claims % of ticket sales on average is 6.1% and that on some small films MP can generate 20% of sales (and that most of their members go to more small films). Since 6.1% is an average, that means MP accounts for less than that on other films. In the case of blockbusters (Black Panther, Avengers, etc), while more people in the country attend those movies I don’t believe it has a one on one correlation with MP’s ticket sales. I say this because the majority of people in the country only see 3 – 4 movies a year, so 88% of the country only goes to the theater for these blockbusters. With that said, MP doesn’t magically catch one for one the additional influx of 3x – 4x more moviegoers that crawl out of the woodwork to see these blockbusters as MP’s subscriber base is fixed and doesn’t suddenly expand 3x – 4x times (although yes, more of their existing subscribers will attend a blockbuster and 3x – 4x of their existing subscribers will go see the movie, but they are still capped at their ~ 2mm – 3mm subscriber base). To state this more clearly, Black Panther was reported to have sold $665 million domestically as of 4/8/18 which if we use an average price of $9.00 would equal 74mm tickets. And the one statistic we got from MP when they released their top 27 movies via tickets sold as of 3/22/18, was that Black Panther was the only one to cross 1mm tickets (exactly how much over 1mm is unknown). However even if we assume that as of 3/22/18 to today MP reached 2mm tickets on Black Panther, that would only account for 2.7% of Black Panther ticket sales. You can also extrapolate what I’m saying by cross referencing MP’s results for the movie Annihilation where MP sold 17% of that movies tickets, 400,000 tickets as of the same 3/22/18 date when they published MP’s to 27 movies, however that movie only grossed 32mm up until it was pulled from the theaters on 4/19/18 which would end in roughly 595,000 tickets sold by MoviePass in total for that film if MP’s 17% share held up till the end. Hopefully I’ve articulated this clearly but let me know if any questions.

    Like

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