Disastrous Weekend For MoviePass; Increased Dilution Ahead

Opening Disclosure — 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 and context 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.

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This weekend proved to be one to forget for MoviePass (HMNY) bulls. Box office registers started lighting up on Thursday and didn’t let up. Revenues were up 129.9% vs. the same weekend last year, pushing the year-to-date tally to $5.5 billion, up 6.4% vs. 2017.

According to industry forecasts, this weekend’s maelstrom now promises to continue through July. Of particular concern for MoviePass investors, June receipts are being dominated by major-studio releases — the very type which MoviePass has little hope of ever gaining leverage against.

This presents a worsening cash-burn challenge for the company. It also promises to pressure shares of HMNY, which has already taken too many trips to the “ATM” via its ongoing At-The-Market offering of common stock.

Because of this, I just increased my short position in HMNY.

Interestingly, HMNY CEO Ted Farnsworth may finally be finding religion when it comes to operating disclosures. He actually foreshadowed this situation last week.

During an interview, he intimated that the company would likely foot the bill for a bearish 7-8% of box office receipts during blockbuster-laden weekends. This is up from the “over 5%” figure provided in the most recent MoviePass presser.

Accordingly, I’ve updated my MoviePass model, which now predicts significantly more cash burn and dilution for the remainder of June, despite remaining conservative relative to Mr. Farnsworth’s 7-8% comment.

“Over 5%” was already an ominous number for the company. Subscriber utilization rates have remained dangerously high since the service launched its unprecedented $9.95 pricing last August. According to internal data shared via an executive interview in September, utilization should have dropped off several months ago.

 

MoviePass has been around for five years, so we have a wealth of historical data. At $39, the average customer would go to four movies a month. At $29, the average dropped to three movies a month. When MoviePass went to $19, the average customer went to two movies a month. So we think we can be profitable on the subscriptions at $9.95 and then make the real money from the additional revenue sources…

…Based on our historical numbers, MoviePass will be similar. People will use it three times in the first month. The second month, they’ll use it twice. Then, in the third month, they’ll use it once or less. After that, they’ll only use it once in a while.

– Ted Farnsworth via Executive Interview with Mark Gomes (September 22, 2017)

If you run the numbers on Mr. Farnsworth’s original assertion, you’ll find that utilization for June should come in 1.0 movies per subscriber. However, based on the company’s recent comments and box office results, the number looks set to be closer to 2.5. That’s 150% above expectations… and enough to drive $64 million of cash burn for the month!

To date, the only meaningful drop-off in utilization has been spurred by MoviePass usage policy-changes. The new measures aided May results. However, the positive impact has already started to reverse. Further, the changes have been accompanied by a sharp drop-off in new subscriber activity. Apparently, MoviePass evangelists are now souring on the service. This catch-22 has been long feared and is now coming to fruition.

This stems from the fact that MoviePass’ initial (and subsequent) customer-behavior estimates have fallen woefully short of expectations. This has precipitated a cash crunch, driving shares of HMNY down some 99% from its 52-week high.

Things appear poised to worsen in the weeks ahead. The stock now sits at 35-cents. According to my share-dilution model (which to date has UNDER-estimated the deleterious impact of the company’s financings), HMNY’s ATM is expected to push the stock below 20-cents in the weeks ahead.

As I forecasted months ago, this summer’s blockbusters are catalyzing a record month of cash burn. Dilution-model calculations show that this could force the company to increase its share count by a stunning 50% by this time next month.

Without a commensurate influx of new shareholders, supply will swamp demand, causing the stock to fall by a similar amount.

Unfortunately, it’s more likely that its roster of supporters will shrink, as this weekend’s results spark a rush to the exits. This will occur if even a small percentage of longs sell. This is probable, since some will inevitably be drawn to the idea of buying shares back next month at half the cost.

An increase in short selling will have the same impact. The appeal has been sweetened in recent weeks, due to 1) the summer blockbuster schedule and 2) the cost to borrow shares, which has ironically plummeted due to HMNY’s relentless share printing.

At the box office, negative catalysts are abounding… and their impact has only begun to be felt.

Hot on the heels of the estimate-beating Ocean’s 8, Incredibles 2 has come out of the gate on fire. It was already forecast to generate over $150 million going into the weekend, surpassing the $135 million animated record (set by “Finding Dory”). However, by Saturday, industry estimates had soared to $180 million.

 

Incredibles-2-End-Credits-Scene

On deck, Jurassic World: Fallen Kingdom is set to be the next big-time smash. Overseas, it opened early to avoid the World Cup, but is still making a play for the record books. It might top $500 million worldwide before it even opens in North America (on June 22).

Adding insult to an already-disastrous weekend for MoviePass, its own feature, Gotti, is officially a bomb. The film was met with an utter lack of interest.

Judging by its Rotten Tomatoes score (average: 2.6/10 from 20 critics), it would appear that Lionsgate was right not to move forward with it. The $10 million movie is estimated to have made less than $2 million across 503 theaters this weekend.

That’s not a record-low debut for such a release, but as one industry watcher put it, “it’s nothing to be proud of either”.

FYI, $2 million represents about 200,000 tickets. That’s just 1 for every 15 MoviePass subscribers. So, despite its best efforts, MoviePass motivated less than 7% of its base to go see the film… for free, no less (and that’s if we assume that every Gotti moviegoer was a MoviePass customer — which is, of course, preposterous).

Those who blame it on the presence of Incredibles 2 as a competitive alternative will only feed into the bearish dilemma facing MoviePass. As I’ve been saying, MoviePass Studios’ offerings won’t stop moviegoers from seeing the movies they want to see. Rather, they will only stimulate increased utilization (to see the MoviePass Studio films).

This presents two problems: 1) if the movies’ reviews aren’t stellar, as has been the case thus far, their downstream value will be de minimus, which will exacerbate the fact that 2) MoviePass is paying $10 per ticket for people to go see their movies, but only getting a fraction of that back, accounting for production costs, marketing costs (including marketing opportunity costs), partners’ stakes, etc.

Speaking of reviews, while all of this is happening, the average review for American Animals is starting to fall prey to more-sanguine critiques, indicating that the initial hype was bought and paid for. This points to the highly competitive nature of the film industry – the most promising properties get scooped up by the majors, which is why they represent a dominant (75%) and growing share of the movie-industry pie.

Thus, HMNY shareholders are counting Mitch Lowe and Ted Farnsworth to single-handedly out-select,  out-maneuver, and out-produce the big boys with a budget that is multiple orders of magnitude below that of its goliath peers.

Exemplifying this reality, American Animals cost $3 million and has barely covered 10% of that in theaters (an amount that MoviePass has largely paid for). Of course, its rolling release schedule is partly to blame, but the falling reviews won’t help its cause.

Nor will major theaters, which haven’t been eager to support the movie offerings of the antagonistic upstart. Whereas major films open on thousands of screens, MoviePass has struggled to attract more than 500 takers.

So, while the company has claimed victory in attracting $35,000 per screen in its opening weekend, the counter argument is that the denominator (the number of screens showing the movie) was JUST FOUR!

Clearly, MoviePass isn’t going to make shareholders rich by producing 12 indy-level movies annually, even if they generate twice the average revenue of the average indy (especially if they are footing the bill for most of the tickets).

But this is just the latest of many bleak revelations in the ill-fated MoviePass saga.

 

Investors now have the following upcoming issues to suffer through:

  1. Continued success for Incredibles 2, along with the release of Jurassic Park, Sicario, and Ant-Man over the next three weeks, respectively. Also, Mission Impossible: Fallout and the Teen Titans animated feature come out on July 27.

 

  1. This week, HMNY will hit 30 consecutive business days below the $1.00 minimum closing bid price requirement. Accordingly, NASDAQ will send a deficiency notice to the company, advising that it has been afforded a “compliance period” of 180 calendar days to regain compliance with the applicable requirements.

 

  1. Bulls have been talking up the prospect of ancillary revenue increases, but I’ve covered that topic many times in my past posts. However, neither they nor I have yet to factor-in the start-up costs / losses from its MoviePass Studios venture. With Gotti and American Animals recouping just a fraction of their production costs (never mind marketing), these films will surely weigh negatively on cash flow for the foreseeable future. Yes, they may profit over time, but MoviePass can ill-afford additional sources of near-term cash burn.

 

  1. According to my model (which, to date, has proven too bullish), June/July cash burn threaten to bring HMNY dangerously close to exhausting its $150 million ATM, necessitating the need for the company to launch a new ATM or other form of financing.

 

  1. June/July cash burn, coupled with HMNY’s low share price will spur concerns that it will soon reach its share-authorization limit. I currently estimate 125M shares of issuance in July, bringing HMNY to a total of 466,821,480 shares.

 

 

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Disclosures / Disclaimers: I am short HMNY. 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.

66 thoughts on “Disastrous Weekend For MoviePass; Increased Dilution Ahead

  1. Yikes, sounds like a very unfortunate development to the MoviePass story.

    Mark – in your professional opinion what is your take on purchasing put options for HMNY? I’m looking at the July 20, 0.5 Strike price puts. They are at ~0.20 per contract. If your prediction proves correct and HMNY falls below 0.20, that is a 50% gain as intrinsic value of the contract goes up to 0.30.

    Also – a little off topic but since I’m commenting already, were you able to receive my SMSI data? I sent it to you through the contact section.

    Thanks.

    Like

    1. I can’t provide investment advice. You have to consult with a registered investment advisor for that.

      I believe I received your SMSI data and the report should be going out today!

      Like

  2. AA was purchased by both Moviepass and Orchard – how do you know that the $3m cost (excluding marketing) was “an amount that MoviePass has largely paid for”?

    AA has reported gross earnings of 0.55m as of 14/6 – estimated earnings after this weekend (17/6) is 0.76m. So that’s already covering 25% of the $3m cost while remaining in limited release – so hardly accurate to state that it “barely covered 10% of that in theaters”.

    Also, find this very unusually strange and speculative: “the average review for American Animals is starting to fall prey to more-sanguine critiques, indicating that the initial hype was bought and paid for.”
    Do you suppose they also paid for the reviews during Canne? Also, if reviews could be so easily bought and paid for, why didn’t they dump that bribery budget into Gotti?

    Like

    1. Fair points, but both were minor to begin with (and a thinly-worded opinion in the case of the American Animals review comment).

      The key point is that they are not going to justify their valuation with limited/rolling release indy films.

      Plus, good movies cover much of their production cost in the first weekend of release.

      Still, these are minor points. The key points are 1) cash burn is threatening to exhaust their ATM with in the next six weeks and 2) utilization is back up after temporarily falling back on their anti-abuse measures.

      They will soon have 300 million shares outstanding and very limited INFLUENCE in the marketplace. I will agree with anyone who says that 8% is a notable percent of movie tickets to be purchasing, but that’s not the important number… the important number is what percent of those tickets do they actually INFLUENCE.

      For a small/independent films, I think they have lots of influence, which is why I’ve been saying for a long time that they should retrench to focus on non-major theaters and non-major movies.

      Liked by 1 person

  3. Hey Mark,

    Just wanted to get your take on the Jan 2019 $5 Calls for SMSI — Just trying to figure out why this is occuring.

    The volume for the Jan $5 calls greatly exceeds both the $2.50 and $4.00 Calls. The open interest and volume have been consistently higher for the Jan $5 calls. The weird thing is the $4.00 calls are not much more expensive then the $5 Calls.

    Last I saw, the prices were .30 for the $5 calls and about $.40-.45 for the $4.00 Calls. Obviously there is a slight upside on the $5 calls if the stock price does reach that high but is it worth risking that much over maybe a 40-70% upside difference?

    Let me know if you can investigate and maybe explain why this is happening?

    Like

    1. Hi. With all due research, I don’t worry about why anybody is buying something or not. I only care about what it’s worth. Oh, I don’t research such things. I research companies (and not upon request LOL).

      If you see a price discrepancy in the marketplace, don’t question it — find a ways to take advantage of it. Cheers.

      Like

    2. Saif, when looking at option quotes, especially some that trade very thinly, the price may have not been updated/adjusted for recent trades in the shares, an example, last week I placed an order to buy 50 calls (not on HMNY) with the price 0 x .19 and I placed it at a limit of .10, I was filled at .03. So look at trades in those options and see the last time they traded

      Liked by 1 person

  4. One smart move by MP was to delay their family plan until late July. As such, they will be spared some of the pain from Incredibles 2/Jurassic as MP requires 18+ age for membership and these two Blockbusters draw a massive audience of those under 18 years old. So even though these movies are blockbusters their age viewership is skewed to younger audiences who have no access to MoviePass and mom & dad have to pay out of pocket for their 3 kids

    Liked by 1 person

    1. Man, no offense, but you surely have to realize by now MP is doing nothing “smart”. They are in survival mode and that was created by their own incompetence, mismanagement and dishonesty.

      Liked by 1 person

      1. We all know Ted is a cowboy and 6 months ago if the family plan technology was ready, he would have rolled it out immediately. Now that it was ready in May and they are actually holding it back to late July implies that Ted is finally showing some restraint (just like he recently did by limiting movies to 1x viewership). Whether we label it as necessity or a smart move, either way it is some much needed financial restraint!

        Like

        1. Who cares???? They are on track to burn over $50 million this month.

          Why don’t people realize that 1) the cash burn for June/July and 2) the persistent utilization rate overwhelm EVERY OTHER ARGUMENT COMBINED?

          Simple. Because they are not trained in how to combat confirmation bias and/or recency bias.

          #nonprofessionalinvestors

          Liked by 1 person

          1. If MP was as strapped from June/July as you say, they would reimplement their annual plan to front load money ASAP. By the way, most of their legacy annual plans were heavily discounted and as they roll off, all those customers will start to pay full price which will incrementally help MP’s margins. In addition, if they power play a price increase at year end when they hit 5mm members, it will be a whole different story for the company. I’m not as heavily focused on June/July as you are as I think a lot of interesting things start to happen before year end, not to mention the MP non-dilute ends in August so the proxy issue goes into high gear too.

            Liked by 1 person

          2. As usual, I have accounted for most of that in my model.

            Also, as I’ve said before that I believe the price increase will prove to be a catch-22 for them. Casual users will go away while non-casual user stick around, hiking the utilization rate while lowering revenues is casual users filter out.

            Finally, the anti-dilute is all but moot, since HMNY own essentially 100% of MP.

            All making this yet-another repeat of our old discussions. But perhaps you needed a refresher… 😉

            Liked by 2 people

          3. We can bookmark and circle back on these at year end, so we can focus on your main point of June/July as we will get all those answers when they report Q2 in August 🙂

            Like

          4. I wouldn’t be so sure they would do the annual plan. Been there, done that and it did not work. I come back to the same argument. The reason nothing works is Ted is running it. He is in over his head and therefore resorts to lying to try to fool people creating a situation where nobody with money trusts Ted. He was already funding with bottom of the barrel type financing before he went to ATM financing. Mark, in my opinion, is pointing out the symptoms of what happens when you put Ted in charge of this. Anyone competent would have taken steps long ago to modify the model so it works better.

            Liked by 1 person

          5. Think about this. Do you think Verizon would do another deal for HMNY stock knowing what they know now? I would bet everybody who has funded this in the past would say the same thing. So you have high utilization creating excessive funding needs for a company run by a CEO that nobody with money trusts anymore. That is called a disaster.

            Liked by 2 people

  5. Mark, I’ve never really gotten the idea of shorting a stock trading below ~.75, primarily because the minimum margin requirement is $2 a share (at least it had been) that being the case unless someone has several million in SMA available or similar buying power the amount of cash tied up wasn’t worth to possible gains??

    Liked by 1 person

      1. they have 180 days to do something upon Nasdaq notice and can file for an additional 180 days, so could be a year before any real risk of a reverse split

        Liked by 3 people

      2. Not sure about you, however in all my years I have NEVER seen 1 case where a reverse split was helpful to shareholders. I’ve seen where someone with 500 shares ends up with 50 and they just sell or have 10,000 shares end up with 250 and just sell, the market makers KNOW after a RS the shares will be coming so they lower the bid, nobody cares so they keep dropping the bid until all the shares are absorbed, then the .33 stock that was adjusted to $6.60 (1 for 20) is at ~$5.25 etc. Your thoughts?

        Liked by 1 person

        1. That’s true, But I don’t think it’s right in most cases. I always say valuation is valuation, so splitting the stock forward or backwards doesn’t matter to me.

          However, the psychological effect cannot be denied. Also, in this case, it does make it easier to short the stock due to capital requirements and some other nuances.

          Liked by 1 person

  6. I also don’t think they can just offer annual subscriptions and just immediately use up that money, can they? I thought there was an intermediary such that they can’t use that money immediately. That way if they go bankrupt two months after someone signs up for an annual plan, they aren’t screwed. I thought I saw that somewhere.

    Liked by 1 person

    1. Yea but the real issue is it slowed growth to a crawl at “full” price. The only way annual generated enough subs was at a deep discount to the monthly rate. In short, it did not work as I said in my post above.

      Liked by 1 person

    2. To add my 2c has been for a long time that they should try a 15 monthly plan, but advertise a discount to 10 if paid annually. Then add a seldom user plan for 5 for 1 movie per month. It is my belief that they would

      Liked by 1 person

    3. One more thing. My suggestions are based on what I think the effect would likely be. I do not have the data the company has to assess whether I am correct. So the fact that the company continues down the present path is quite concerning. Are they waiting on the sky to fall?

      Liked by 1 person

      1. CONSIDERING THE CITIES WHERE GOTTI DID WELL, MP ONLY ACCOUNTED FOR ~50,000 TICKETS. So they motivated less than 2% of their own customers to go see it.

        That’s not influence 😔

        ——————————-

        We’re hearing this morning that MoviePass accounted for 40% of the $1.67M opening ($668K) to John Travolta mob pic Gotti, which took headlines over the weekend for its 0% Rotten Tomatoes score from 23 critics.

        During CinemaCon, the monthly movie ticket service took a low-seven figure stake in the reported $10M budgeted feature which has willed itself to existence over the last seven years, and ultimately acquired the pic’s production company, Emmett Furla Oasis Films. MoviePass accounted for roughly 25%-35% of the opening four-theater $135K weekend of The Orchard’s American Animals, which they also took a piece of out of Sundance. Many in the industry are already writing MoviePass’ obituary, yet anecdotally we hear from non-MoviePass sources that the subscription service is driving midweek business at local LA indie theaters with the under 25 demo and summer vacation in effect. How long will this ride last?

        https://deadline.com/2018/06/moviepass-gotti-opening-rotten-tomatoes-0-1202412227/

        Like

  7. Almost every bull argument that’s still alive focuses on what HMNY should do or what they probably will do. I was convinced that MP was going to add to the list AMC theaters that they took off line last year. Instead they did the absolute opposite of what everyone thought they should do when they brought the 10 back on-line with zero concessions.
    Its never been more true that you can’t base your investment on what they should do. Think MP should raise rates? They just did the opposite. Three of my friends are enjoying a free month of MP this month after I sent them an invite last month. There’s $120 of expense with $0 to offset it. Its crazy town.
    The one exception that I’ve seen is Bob Visse who made a case that the MP patent is worth much more than the market cap.

    Like

    1. Truly a bizarre mystery as yes there are so many things management could do at the flick of a switch to change the economics for the better. However, that failsafe is always there and that’s why bankruptcy risk is small at this juncture. But jeez, these guys really like to walk the tight rope on their journey to build this company!

      Like

        1. I just think Ted wants this thing as big as he can as quick as he can. However, you’ve already stated too for the record that you don’t think bankruptcy is on the table as management does has levers that it can pull if needed. And yes, this would slow growth and change the dynamic of the company completely

          Like

  8. Well I can definitely tell you have taken a short position in this stock. I would say this was the least factual (lacking support) and most opinionated article you have written in awhile. I get making money being short but this is an awful assessment. I have a July Short, August Long perspective for full disclosure.

    Like

    1. I respect your opinion, but will respectfully disagree. I try to be as factual as possible to avoid a loss of credibility.

      Of course, in that regard your opinion matters more than mine, so I appreciate your feedback. I’ll remain mindful of that for future posts.

      Like

      1. Maybe Ted gets the boot 😉 Or probably just nothing, guess we’ll have to wait until tomorrow to see if this has any legs

        Like

        1. In the end it looks like Citadel market makers drove it up to sell their shares before the dilution news dropped 😉

          Like

  9. HMNY seeking to auth another 2 billion shares and also a reverse split 1:2 – 1:250 I’ll go out on a limb and say it will be closer to 1:250 after they dilute the SH’s into oblivion with the 2 billion additional shares. You just can’t make this stuff up. It was clear as day that this was going to happen. I wasn’t expecting the additional 2 bill shares tho.

    Like

  10. Over the next 30+ days this looks like it may become a do or die moment like Sirius in 2009. Keep your dry powder ready

    Like

    1. You’re still living on that SIRI win 😂

      I understand why, but each situation needs to be evaluated individually. I remember when SIRI was in trouble and it was for different reasons than this one. I like “build it once and sell it many times”. This is not that.

      This is quickly approaching check made and they haven’t made any measurable progress by my standards.

      Like

        1. They are reckoning to have 2 billion shares outstanding. So, even if they eventually reach unicorn status with a $1 billion valuation, the stock will still only be $0.50

          I continue to defer to my model.

          It’s not me. I’m just running the math that Management gives us.

          Like

          1. Hence under the unicorn scenario my .01 investment will go up 50x, now we are talking! But maybe I hold out to buy at .001

            Like

          2. No… by that point, they’ll have 100B shares out. I keep telling you that you have to do the math!

            Remind me why I keep discussing this with you? 😂

            Like

          3. Say what, these were your own words “They are reckoning to have 2 billion shares outstanding. So, even if they eventually reach unicorn status with a $1 billion valuation, the stock will still only be $0.50”

            Like

          4. Yes… at THAT point in time… and then it keeps going.

            It was a hypothetical and off the cuff.

            Ted is on recent record as saying they may need another $200 million next year, so what will they need in 2020 and 2021?

            Like

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