HMNY’s ATM Offering: Where’s The Stock Going Next?

Stock Research 6 Minutes

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.

 

After a busy week of drilling into the exciting new events going on at Smith Micro, I finally got some time to take a look at what’s happening at MoviePass.

As I predicted months ago, shares of HMNY have fallen from $12 to $2. Seeing this coming was not a matter of luck, but simple mathematics.

Combining data from HMNY’s last couple of offerings with my MoviePass profit/loss model, I built a new “dilution model”. The purpose was to predict when the next rounds of funding would take place… and what they would do to the stock.

As most of my readers know by now, my first funding prediction was dead on.

The model predicted the company would raise $100M in April. In turn, the calculations suggested that the offering would knock the stock from somewhere around $4 down to about $2.40. Bulls scoffed, partly because HMNY CEO Ted Farnsworth had publicly stated, “I probably shouldn’t say this, but we won’t need any more funding.”

To that, I replied, “He’s right… he probably shouldn’t have said that.”

Sure enough, on April 18th, a major round of funding was announced. The following is a discussion I had with a bullish shareholder, shortly after the press release went out:

hmny2

Sure enough the stock fell by as much as 40%+ the next day.

But not everything about the prediction was accurate. I expected the company to raise $100 million… but they couldn’t generate enough interest. As a result, the company settled for just $30 million.

To fill their remaining needs (and it’s still clear from my model that they have significant needs), HMNY initiated a $150 million at-the-market (ATM) offering. Aptly named, an ATM is basically the same thing as printing money.

However, instead of it being the U.S. government printing dollars, it’s HMNY printing shares of stock AND SELLING THEM INTO THE OPEN MARKET AT ANY PRICE (currently $2). That’s what they’re doing RIGHT NOW. It’s a like a reverse buyback (and the biggest one I’ve ever seen, representing somewhere around 100% of the current outstanding shares).

They are doing this via Canaccard (the company that has been telling investors that the shares are worth $15). Canaccord will be receiving / selling the shares from HMNY and sending the cash (minus their cut) back to HMNY to fund MoviePass losses.

 

Question: Why would they sell $150 million worth of shares at $2 if they thought it was worth more? Why not take out loans? It’s simple. No institution will lend them money or pay more than $2 for their stock.

 

Of course the company has done a lot to improve their operations. They’ve also remained active in the news. However, while all of their new initiatives should help to stem the bleeding, none of them (not even all of them combined) did much to significantly alter my MoviePass model or dilution outlook.

As I’ve said before, MoviePass might turn out to be a success, but current shareholders will take losses until the funding / dilution issue is behind them. I might buy the stock at some point (and will immediately announce if and why I do)… but right now, I’m more inclined to wait for a little bounce and then short it.

With the incredible lineup of movies on the 2018 schedule, my model only sees one ray of light (Aug-Oct) for investors between now and year-end.

Other than that window, the company will be needing so much cash that the shares simply won’t be able to sustain the $2 level for long. The $150 million ATM is underway and my model predicts that it will require constant printing/selling to get the company through the summer blockbuster gauntlet (which will persist through July).

Raising $150 million with the stock at $2 will require at least 75 million shares to be issued. Running the numbers, the most likely scenario is that HMNY is sitting somewhere around $1.50 in mid-July.

It could be a little higher than that, but it could also be a lot lower than that.  This is especially if retail investors finally realize that it’s best to let the stock fall and think about buying HMNY after the summer blockbuster season is over.

HMNY Timeline

The key word is “think”.

That’s not to say that there won’t be tradeable bounces, but timing them is reserved for investors who are good at catching falling knives. Personally, I believe it will be much easier to short the pops than time them.

Ever since initiating this blog (back in January) I have refrained from shorting the stock. I did so to establish neutrality in hopes of helping investors understand what was destined to happen to this stock.

It worked. I’ve received a lot of thanks from investors who were avoided HMNY recent crash. Looking ahead, my model predicts further stock-price declines to come.

That being said, if I haven’t convinced investors by now, I never will. Accordingly, I am lifting my self-imposed restriction on trading the stock. So, I am now actively looking for opportunities to short HMNY and/or make options bets that will profit from a decline in the stock.

Stay Tuned…

 

More 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 have no position in HMNY (yet). 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.

Published by Mark Gomes

Mark Gomes is an Information Technology expert with over 20 years of experience. During his career, Gomes led the investment research efforts at numerous IT consulting organizations, including International Data Corporation (1994-1998), and AMR Research (1998-2004), which was later acquired Gartner Group. In 2004, Mr. Gomes founded Pipeline Data, LLC where he provided investment consulting to many of America's most well-respected mutual fund and hedge fund managers. In 2008, Mr. Gomes semi-retired and began donating his research to Seeking Alpha. He quickly built a reputation for accurately identifying inflection points and M&A candidates. Outside of the investment world, Gomes is a Masters Track & Field World Champion and multi-time world record holder. In 2012, he published "Faster Than Forty", which detailed his diet, lifestyle, and training techniques. Today, he serves as a volunteer track coach to children and adults in the Miami Beach community.

Published

46 thoughts on “HMNY’s ATM Offering: Where’s The Stock Going Next?”

  1. And you just got an opportunity, reminds me of the old days when Mitch would show up on TV and the stock would run. Now we ran up to it and gets shorted on every pop. Nothing to scare shorting now, there was NOTHING on L2 ask this morning and still kept getting beat down.

    Not sure if you caught CNBC my two takeaways:

    – Mitch: “We introduced changes in the past couple weeks that cut usage by 30%”. 30% of what?? I assume he is indicating the “only one viewing per movie” and “take a photo of your stub”. Both of those were features in the past, why wait so long to re-introduce if it can cut usage by 30%? As we have mentioned all along, why wait on these cost cutting measures. Especially features you ALREADY had in the app?

    – 83% of customers “Very Satisfied”, the highest compared to Netflix, Hulu, Spotify, etc… Not sure if they are comparing apples to apples on the surveys. BUT I still give them kudos for having this level of satisfaction considering the early card delays, customer support issues and the fact that it is technically a little harder to use than a basic streaming subscription.

    Liked by 1 person

    Reply

    2. Why did I long make my bullish case while Mark continued to push back on my arguments? Because I always thought they could adjust the usage rate, pricing, inventory, new plans, etc. and find the right combination to bring the cash burn down to where it was sustainable. That would then allow them to eventually attract the funding needed to push this to unicorn status without diluting themselves into a death spiral. In fact, I could not imagine any CEO with any sense at all putting the company into it’s current funding situation. Nope. Anybody with any sense would recognize when it was time to pull the reigns in. Right?

      What I did not count on was:

      1. Ted being a flat out liar. I know that sounds harsh, but the 375M line of credit comment (along with a personal experience) proved that to me beyond a shadow of a doubt. I am still blown away that he seems to have no clue the damage he has done to his chances for success as a result of his dishonesty.

      2. Ted being incompetent as demonstrated by his inability or unwillingness to take the appropriate actions required to control the cash burn in time to avoid all of this now highly dilutive financing. The only reason to delay is if their cash flow situation was better than we thought or they were clueless (maybe delusional) about it. It appears now the latter is the case. I imagine the push to own all of MoviePass tainted his vision a bit, but that is speculation and frankly it doesn’t matter why.

      So what is my point? To share the things I would be looking for going forward.

      1. Ted either is fired, leaves or at least has his stock incentive package rewritten to align it with shareholders interests. I believe no serious institutional investor will put in money as long as they know Ted can and will lie and dilute with no consequence to his ownership.

      2. Full resolution of proxy. I think it is a given that this will happen at this point, but it still has to be completed.

      3. Prove the model can cash flow over a period of time with a combination of steps they have available to them as mentioned above. I think it is critical that this is done while still producing a decent subscriber growth rate and be able to show through the data collected during this time that the unlimited model is sustainable at a certain subscriber count.

      4. Then go secure the commitment for funding needed to accelerate growth with the unlimited only once they have the data to prove it works and funding that is affordable to do it.

      5. Return to the original unlimited model and continue to execute on that along with the additional revenue streams that go along with it.

      Liked by 1 person

      Reply

  2. “Our investors are really supportive”. Did you catch that? I know it’s not a data point, but it tells you Mitch has nothing else up his sleeve regarding funding.

    Like

    Reply

    1. I did, I more interpreted it as investors are pressuring them and want MP to get cost cutting and usage cutting features in ASAP. And honestly the largest “investor” now has to be Ted (well and Verizon) by share count sooo….

      Like

      Reply

      1. Aenathema – I went back and listened to that comment again. You might be right. I originally took that to mean the investors buying the HMNY offerings. You know. The ones that will only buy at a 30% discount with a warrant! 🙂

        Like

        Reply

      1. That was his answer to the question about whether they were looking to raise more money and the path to profitability. He did not confirm yes or not about raising money. He said our investors are really supportive then moved on to the 30% comment that Aenathema posted above. So I would consider that more confirmation that they are looking to and needing to raise more money as you said.

        Like

        Reply

          1. I have done the math and I am not sure they can complete the 150m ATM before they need to raise cash again. If I am right about that, then they have to reduce consumption by 30%.

            Like

  3. Man it’s just sad really. It’s a great product. I got it for my father in law for christmas and he thinks it’s the best thing since sliced bread. He’s one of the “Evangelists”. I’ve been thinking for a while now their only hope was a big company or investor to come in and fund them, but now it’s easy to see that if someone does, they were just waiting on the fail, so they can scoop it up cheap. Like Mark said before, they have put a ton of sweat equity into it thus far.

    Like

    Reply

  4. You mentioned the “I probably shouldn’t say this” remark. In addition, the CEO’s did a yahoo interview days before the round where Ted stated “We feel the stock price is undervalued” (@ $3.50, if I remember correctly). In addition there was the Variety article where Ted stated he he had a “$375M line of credit” which caused the stock to run to $4.65.
    I hope there are lawsuits that put a permanent damper on the company and scare future investors away. It doesn’t matter financially to me. hmny was a win overall. But the way management treated shareholders over the past few weeks is disgraceful. The remarks Farnsworth made the week of funding trapped investors at $4+. Liars and crooks.

    Liked by 2 people

    Reply

    1. And of course the most interesting: Lowe says that by the end of May MoviePass will introduce plans that include more expensive screenings, like 3-D and IMAX, as well as plans to accommodate families and friends.

      Like

      Reply

  6. Being very active with the deletes today. Comments should be insightful and analytical. No offense to anything that gets deleted.

    Sadly, many still don’t understand that 70 million shares of the stock are being sold off by Canaccord on behalf of HMNY management. Therefore, these no-context comments will surely become more frequent and the norm in order to pop the stock for their sales.

    Most notably, “reduced consumption by about 30%” — we can’t determine if this is minor or significant without context.

    Next…

    Like

    Reply

  7. I’ll leave my interpretation off but I still think its relevant for your readers to see what Mitch just said and decide for themselves: Mitch on CNBC today said – We actually, over this last week, have initiated tactics in our system that have reduced consumption by about 30%

    Like

    Reply

  9. Psychologically speaking this stock is due for a rip. Ben the biggest bull has for all intents and purposes has thrown in the towel. Mark who has been spot on all the way down is now ready to short. This stock has about the worst sentiment I have ever seen literally almost no one believes in it anymore. Should be interesting the next 2 weeks. The math still shows no turnaround longer term. I have added to my AEHR position. On a technical basis this looks to have bottomed and should be starting up soon.

    Liked by 1 person

    Reply

  10. Hard to disagree but I tipped my toe back into a long position here after dumping most in $4.50s. Glad to see unlimited back. As long as the only plan was 4 a month, I predicted a quick death for the company. Paradoxically, the 4 a month plan would lead to HIGHER utilization rates.

    Liked by 1 person

    Reply

  11. One other interesting comment from the interview was Mitch said owners of 7,000 movie screens in the USA, who he met at CinemaCon said for MP to send them a contract (that’s out a total of 40,000 in the USA) so that’s 18% more exposure (remains to be seen how many of those sign the contract & give concessions to MP but it sounds like it’s more of the smaller independents who tend to be more receptive to revenue sharing).

    Liked by 2 people

    Reply

    1. GREAT comment and analysis.

      I meant to mention that. THAT was the most valuable data point of the interview. Need to do a little more research / analysis to ascertain its significance 👍🏼

      Like

      Reply

  12. This was interesting too in the interview and also quoted in Wired (could both sides be moving closer to some kind of deal by the end of the year)? Lowe told Wired that the company is still “fine-tuning this model,” but said MoviePass has fixed its relationship with AMC theaters. “I can assure you that we are not contemplating or even thinking about removing any AMC theaters,” he says.

    Liked by 1 person

    Reply

    1. Mitch’s definition of “fixing the relationship” is admitting to AMC that they need them more than AMC needs them? AMC confirmed recently that there had been no talks with MoviePass recently, so the change was all MoviePass driven.

      In my opinion, this is just more spin because HMNY needs good press right now, the stock has been taking a beating.

      Like

      Reply

      1. “MoviePass subscription now only allows four movies per month with its $10 plan. The company calls it a temporary promotion, but when the Hollywood Reporter asked CEO Mitch Lowe if the daily ticket subscription would ever return, he replied, “I don’t know.” Lowe claimed that 88 percent of subscribers see fewer than two movies per month, so he says this change only affects a small number of people. “We just always try different things,” he said. “Every time we try a new promotion, we never put a deadline on it.”

        http://m.wtvm.com/wtvm/pm_/contentdetail.htm?contentguid=od:3udWeHmz

        Like

        Reply

  13. Keep up the good write ups. I’ve been quietly following and reading. As you know from our conversations, I’ve always been turned off by the cash burn and it’s only gotten worse. I see the ATM offering as a sign of desperation given the insane dilution it would create. No way this will end well unless they somehow sign a partnership with AMC and/or Cinemark.

    While I’m no longer actively trade stock, I have made a good deal buying and selling the $2.50 and $2 puts. I think options is the way to go if you want to minimize risk. You can still make money on $HMNY without going short and all the risk that comes with it.

    Like

    Reply

  14. Ted — “…we have plenty of money to get through the next year.”

    MG — then why are you CURRENTLY selling 70,000,000+ shares of your stock via an At-The-Market offering?

    Mitch — “We love the idea that everybody thinks that we’re going to fail. It’s exactly what people told us at Netflix and Redbox,” said Lowe. “And then suddenly they all turned around and realized we were too big to stop.”

    MG — Yes, after you sold your own Netflix shares. So, clearly you saw it coming.

    http://m.wtvm.com/wtvm/pm_/contentdetail.htm?contentguid=od:3udWeHmz

    Like

    Reply

  16. Sinemia
    Get your free 2D or 3D tickets in any theater,
    at any movie and benefit from features like reserved seating,
    the IMAX-4DX-XD-ScreenX-DBox experience,
    private screening and more for one low monthly fee.
    https://www.sinemia.com

    Like

    Reply

    1. Good luck with that as they will rip out your eyes after a few months by tripling/quadrupling the monthly price on you once you’ve shown you actually see the full amount of 2 or 3 movies you signed up for a month. They only want to keep customers who see less than their plan allows. Not to mention they also uncharge you if you want to buy a ticket in advance, and for all their talk about 3D/Imax if you sign up for a multi-movie plan you are limited to only 1 3D/Imax ticket a month even if you signed up for the Elite multi movie plan!! SInemia is really really shady

      Like

      Reply

        1. In the end, 2 very different models. MoviePass is focusing on becoming a household name while the other is a fringe/niche player. Excluding the economics of the movie subscription models, the jockeying reminds me of the early days of fantasy sports when FanDuel/DraftKings went big and numerous other companies took a tepid approach and just couldn’t keep up – thus being relegated to fringe/niche players.

          Like

          Reply

  17. HMNY/MOVI valuation is just $112M. At 3M subscribers that is about valuation of $37 per subscriber. Plus the brand, the customer base, the revenue, the patent, the sizzle. Growing 1M subscribers every 6 week’s expected for next 4 months, about another 3M subs expected by September, or so. Company has what for debt, ziltch? Stock dilutes 100% on ATM, and it’s still very cheap. And if price halves on dilution, then a simple double will be easy from $1, it’s back at current prices double valuation, yet double subscribers too. Seems a buy to me.

    Like

    Reply

    1. I understand your points. In fact, I’ve been keenly watching them. However, stocks move on story, fundamental progress, funding needs, and supply / demand.

      For HMNY, the printing of 70M+ shares is ONGOING and creating a supply/demand imbalance that will persist until it’s completed. I’ll reassess when that happens.

      Like

      Reply

  18. I like your point. You think they’re selling 1M shares a day? That’s not too much on daily volume to affect price too much if at all, yet supply/demand interesting idea. Wouldn’t possibly some institutions want 1M a day to make money just loaning out shares to shorts and in return receiving a very strong/high interest rate of return? Just an idea.

    Like

    Reply

    1. IDK how many they’re selling per day, but I don’t think it’s a fixed amount.

      Just keep in mind that 1 million shares doesn’t have to be a large percentage of the total volume to tip the supply/demand balance. If you exclude in/out trades, the real buying/selling volume is lower… and less than half of that has been buying.

      People think I’m a basher, but I’m not. I’ve been calling it as I see it since Sept (when I was bullish). Right now, I don’t understand the incentive to be in. Of course, I could be wrong, but the blockbusters + ATM adds up to a big headwind for them to overcome.

      As for the institutions, it’s possible, but if they run the math, most will see that they have a good chance of getting in cheaper after the blockbuster season is over, while also collecting more data points on their progress.

      Just my opinion though. We’ll see how it turns out. Thanks for the professional demeanor BTW. It’s always appreciated in someone with a different view. 😊👍🏼

      Like

      Reply

  19. I suppose the ‘story’ factor I also consider relevant. We’re all waiting for MP merger news. And Zone spin-off news (oh boy, well, it’s something). Which I expect will bring in buying and drive HMNY price higher. But the news never comes.. You remember when they always kept saying they had a big backer? Are they saving an ace card, or what the heck was that about?

    Like

    Reply

    1. Exactly. I tried to tell people. Ted was doing this to me from the first time I spoke with him, back in Sept. I just didn’t realize it until Nov (which worked out, fortunately).

      Plus, once everyone knows something, it kinda gets priced in (which is why he tells stories — to get the stock up so he can raise $$ at a higher valuation).

      If people stopped buying it (literally and figuratively) and dumped their shares, the stock would be pennies in no time, they’d be forced to clean everything up, and maybe then we’d have something worth buying. 🤷🏻‍♂️

      Like

      Reply

Leave a comment