This article originally appeared on my Market Adventures site, at 6:30am. Given the risk to retail investors, I am compelled to share this.
A Market Adventures reader asked me about the meteoric rise in shares of Helios and Matheson Analytics Inc. (HMNY). My response was that this will end, very, very badly.
Before we dive into what HMNY does and how it losses money, keep in mind that its shares were trading at just $2.50, as recently as September 13, 2017. Shares hit an intraday high, October 11th, of $38.86 on crazy volume.
Source: Yahoo Finance
Also, as required reading, please read SA Contributor Mark Gomes’ piece from September 22, 2017: MoviePass And Helios Executive Interview.
Here is quote from HMNY’s CEO Ted Fransworth. Somehow, I’m not surprised that Goldman Sachs is somewhat involved in this name, at least indirectly.
FYI, Studio Movie Grill is “partnered with EFA Partners and Goldman Sachs who recently helped increase the company’s debt facility to $85 million.” At the end of 2016, Studio Movie Grill took an equity stake in MoviePass. My sources suggest that Goldman is now deeply involved with MoviePass. If Goldman banks/endorses their IPO, the valuation implication for HMNY will surely be meaningful.
On August 11th, Helios filed its 10-Q for the reporting period ending June 30, 2017.
As you can see below, this company, if you can even call it a company did an impressive $1.14 million in quarterly revenues.
Through the period ending June 30, 2017, its accumulated deficit is $55 million!
As you could work out from Mark Gomes’ interview with Ted Fransworth, HMNY intentionally structured a complicated and conditional financing transaction with MoviePass for the right to acquire a 51% equity stake in the business for $27 million.
Here is the important timeline of events:
A) On August 15th, HMNY filed this 8-K (see here) – $27 million conditional deal to purchase 51% of MoviePass:
As previously disclosed in the Current Report on Form 8-K filed by Helios and Matheson Analytics Inc. (“HMNY”) on August 15, 2017, HMNY and MoviePass Inc. (“MoviePass”) entered into a Securities Purchase Agreement (the “MoviePass SPA”), pursuant to which HMNY agreed to purchase a majority stake in MoviePass for an aggregate purchase price of up to $27,000,000 (the “MoviePass Transaction”).
Note the following details:
Accordingly, HMNY expects that it will become obligated to issue the Helios Milestone Shares (as defined in the MoviePass SPA) upon the closing of the MoviePass Transaction, equal to 666,667 unregistered shares of HMNY’s common stock. This is in addition to the $25,000,000 base consideration to be paid by HMNY for a majority stake in MoviePass, subject to and in accordance with the conditions set forth in the MoviePass SPA.
B) On August 21st, HMNY filed this flashy 8-K (see here) – Movie Theatre attendance has increased 2,000% at one movie theatre:
HMNY is providing this Current Report to disclose the performance of MoviePass in filling theater seats for two theater chains that have partnerships with MoviePass, for the six day period from August 15, 2017, through August 20, 2017 (the “Measurement Period”), following the announcement of the MoviePass Transaction and the new MoviePass $9.95 per month subscription price.
In one of the theater chains, during the Measurement Period, the number of theater seats filled by MoviePass increased from 206 to approximately 4,137, representing an increase in excess of 2,000% as compared to the seven day period preceding the Measurement Period.
In the other theater chain, during the Measurement Period, the number of theater seats filled by MoviePass increased from 203 to approximately 1,795, representing an increase of approximately 884% as compared to the seven day period preceding the Measurement Period.
These two theater chains have theaters located in Arizona, California, Florida, Illinois, Michigan, Missouri, North Carolina, Pennsylvania, Indiana and Texas.
Due to the amount of time and mental gymnastics it requires attempting to follow the dilution bouncing ball (I already have spent two to three hours on this dilution bouncing ball trail), I tried to summarize it and provide backup. So from prior senior secured convertibles, HMNY has issued 5.062 million shares at roughly $4 per share (see the details below).
Prior Senior Secured Convertible Note Transactions
We have entered into transactions similar to this transaction with the selling security holder in the past.
On September 7, 2016, we issued senior secured convertible promissory notes to the selling security holder in the principal amount of $4,301,075 for consideration consisting of a cash payment by the selling security holder in the amount of $1,000,000 together with an investor note payable by the selling security holder in the principal amount of $3,000,000, which was prepaid prior to the maturity date. We paid these notes in full by issuing 887,707 shares of our common stock and making a cash payment of interest in the amount of $1,660.
On December 2, 2016, we issued senior secured convertible promissory notes to the selling security holder in the amount of $6,720,000 for consideration consisting of a cash payment by the selling security holder in the amount of $1,100,000 together with an investor note payable by the selling security holder in the principal amount of $4,900,000. As of September 14, 2017, the selling security holder has converted a total of $5,820,000 in principal amount and $44,765.45 in accrued interest under these notes into an aggregate of 1,481,064 shares of our common stock. The principal amount we owe under these notes is $900,000 while the principal amount still remaining to be paid under the investor note is $670,000.
On February 8, 2017, we issued senior secured convertible promissory notes to the selling security holder in the amount of $5,681,818 for consideration consisting of an investor note payable by the selling security holder to us in the principal amount of $5,000,000, which was prepaid prior to the maturity date. We paid these notes in full by issuing 1,852,886 shares of our common stock.
On August 27, 2017, we entered into a letter agreement with the selling security holder pursuant to which the selling security holder agreed to immediately convert $2,500,000 of the February notes at a price of $3.00 per share. In exchange for the conversion, we agreed that the selling security holder will have the right, until December 31, 2017, to elect to exchange up to 841,250 shares of our common stock for one or more senior secured convertible promissory notes, which would be due to be repaid within 45 days of the selling security holder’s election. Pursuant to the formula set forth in the letter agreement, if the selling security holder elected to exchange all 841,250 shares of common stock, we would be required to issue secured convertible promissory notes in an aggregate amount of $2,500,000.
So all of the prior dilution and capital raises were to fund other misadventures.
Within the S-3, then there is this new Senior Secured Offering to fund the MoviePass payments.
On August 16, 2017, they issued another roughly $10 million worth of senior secured convertibles with an exercise price $4.
Worst still, the August 16th capital raise included a five-year warrant with the right to buy 1.893 million shares for $3.25.
In addition to the Convertible Notes, we issued a five-year Warrant to the Investor on the Closing Date for the purchase of 1,892,972 shares of our common stock (the “Warrant Shares”), at an exercise price of $3.25 per share, subject to adjustment provided under the Warrant.
So based on my math, prior convertibles were exercised and 5.061 million new shares were minted. Then with the new deal associated with MoviePass, results in 2.687 million shares being minted at $4 and another 1.893 million warrants that will be exercised at $3.25.
In other words, 9.64 million shares have a cost basis between $3.25 and $4, yet if you visit StockTwits, #HMNY is the next Netflix (NFLX). Keep in mind this stock has gone from $2.50 to as high as $39!
Moving along, I want to focus on the qualitative reasons why MoviePass is fraught with risks.
Per HMNY’s 8-K filed, October 11, 2017 (see here)
Look at these risk disclosures
What MoviePass is:
MoviePass was incorporated in Delaware in 2011 and is a movie theater subscription service that allows members to see a new movie every day in theaters nationwide for a monthly price of $9.95. Once they sign up for the MoviePass service online, subscribers are prompted to download the MoviePass application on their smart phones and are then mailed a MoviePass debit card. The MoviePass application shows subscribers the showtimes of all the movies that are currently showing at their local movie theaters. Once they have received their MoviePass debit card, subscribers can use the debit card to purchase up to one movie ticket a day at any of the movie theaters listed in the MoviePass application without paying any additional costs.
Here are the risk factors spelled out in its most recent 8-K
Exhibit A – Due to losses and lack of funding: might not be a going concern
MoviePass has incurred losses since its inception and has a present need for additional funding. These factors raise substantial doubt about MoviePass’ ability to continue as a going concern. For the foreseeable future, MoviePass expects to fund its operations from additional debt or equity offerings and increased revenue from subscribers. If MoviePass cannot raise additional short-term capital, it may consume all of its cash needed for operations. There are no assurances that MoviePass will be able to raise capital on terms acceptable to it. If MoviePass is unable to obtain sufficient amounts of additional capital, it may be required to reduce the scope of its planned growth, which could harm its business, financial condition and operating results. As a result, MoviePass expects that its independent registered public accounting firm will include an explanatory paragraph in its audit report on MoviePass’ financial statements for the years ended December 31, 2016, and 2015 with respect to the uncertainty of MoviePass’ ability to continue as a going concern.
Exhibit B – MoviePass pays the threaders the full cost for each ticket
MoviePass’ monthly subscription pricing plan of $9.95 per month allows a subscriber to see a new movie each day for the entire month. In most cases, MoviePass pays the theaters the full cost for each movie ticket that a subscriber uses. Accordingly, increased movie viewing by subscribers would result in significant and increasing losses per subscriber, negative cash flow and could impair the ability of MoviePass to operate as a going concern absent additional sources of revenue or financing.
Exhibit C – MoviePass pays full price of each ticket. No relationships with large national cinema companies
MoviePass has historically paid large national exhibitors full price for each ticket purchased by a MoviePass subscriber through the MoviePass application (though in the past, MoviePass has received as much as a 20% discount on movie tickets for its subscribers from a small group of its exhibitor partners that currently represent less than 6% of all movie tickets that MoviePass currently purchases). Additionally, MoviePass has not historically received a benefit from any large national exhibitors for driving MoviePass subscribers to their theaters (for example, in the form of a portion of concession sales). MoviePass anticipates negotiating discounts on movie tickets and receiving a portion of concession sales to its subscribers attending theaters operated by those exhibitor partners. However, if MoviePass is unable to partner with large national exhibitors, (I) MoviePass likely will continue to be required to pay full price per movie ticket each time a MoviePass subscriber attends a movie theater operated by a large national exhibitor, (ii) MoviePass would be unlikely to share in concession sales to its subscribers attending those theaters, and (III) MoviePass may not be able to sell digital advertising or data analytics services to those large national exhibitors. If MoviePass is unable to negotiate discounted ticket prices from, share in concession sales with or sell digital advertising or data analytics services to large national exhibitors, MoviePass’ financial condition and results of operations may be materially and adversely affected, MoviePass may not become profitable and MoviePass may not be able to sustain its operations.
Exhibit D – MoviePass hopes it will make money (somehow) from digital advertising
MoviePass’ success will depend, in part, on deriving revenue from sales of digital advertising and data analytics services to large movie studios. However, if MoviePass is unable to gain acceptance from large national exhibitors (movie theater chains), upon which large movie studios depend to distribute and exhibit their movies, then large movie studios may refrain from purchasing digital advertising or data analytics services from MoviePass. If MoviePass is unable to derive revenue from selling digital advertising or data analytics services to large movie studios, MoviePass’ financial condition and results of operations may be materially and adversely affected, MoviePass may not become profitable and MoviePass may not be able to sustain its operations.
This is the classic story of lots of sizzle due to the Mitch Lowe’s connection to Netflix (NFLX) and Redbox. However, through lots of complicated and highly dilutive capital raising, as of today, HMNY essentially owns a 53.71% stake in MoviePass. They struck a deal and agreed to continually pay (upon certain milestone being met) $28.5 million for that equity stake. Now based on the hype that 400,000 people signed up for a product whereby HMNY will lose some to a lot of money, per subscriber, the market has temporarily been fully bedazzled and bewitched by MoviePass’s dare I say snake oil allure.
This broken business model is essentially a debit card where MoviePass collects $9.95 per month and that enables subscribers to watch one movie per day, every day per month. So if you are a retired person or college student, or someone with lots of free time on your hands that likes going to the movies, you could watch upwards of 20 movies, per month. So MoviePass’s losses, per active subscriber, could be exponential. Even if collectively the group of 400,000 subscribers watch two or three movies per month then HMNY losses $10 to $20 per subscriber for every $10 in revenue it generates.
Let’s review the facts on the ground:
1) MoviePass owns ZERO movie studios
2) They own ZERO cinemas
3) They buy their tickets for full retail prices
4) Other cinema chains that actually own lots of locations can easily copy this subscription model.
5) This is absolutely nothing like Netflix or Redbox. Netflix started off as an owner of a huge collection of DVDs, so once they bought the discs then they had the right to share it or rent it. NFLX owned the content. Over time, NFLX rapidly evolved into a highly sophisticated technology company and acquired compelling content through licensing deals as well as creators of original content. Redbox is a melting ice cube, but again, they bought the discs, so they owned the legal rights to rent them.
Finally, within last night’s 8-K, the folks at HMNY had the audacity to say they have the right to buy another $20 million worth of MoviePass at a “pre-money valuation” (a fancy private equity term for pre-IPO valuation) at $210 million. So if we accepted that valuation at face value, then their 53.71% stake x $210 million equals $113 million.
As I said, I’m still working out the full dilution accounting from HMNY’s 4 Senior Secured Convertible offering and recently announced now highly dilutive warrant deal at $3.25 per share. For talk purposes, it appears that HMNY’s fully diluted shares are easily north of 10 million (and Ted Farnsworth quoted 13 million shares in his interview with Mark Gomes). So at yesterday’s closing price of $32.90, HMNY had an equity valuation of at least $330 million and upwards of $425 million (if we factor 13 million shares) for a company that’s stake, per its 8-K (see below) has a “pre-money” valuation of $210 million x 53.71% or $113 million!
On October 11, 2017, Helios and MoviePass entered into an investment option agreement (the “Option Agreement”), pursuant to which Helios was granted an option to purchase additional shares of MoviePass common stock in an amount up to $20 million based on a pre-money valuation of MoviePass of $210,000,000 (the “Option”) amounting to an additional investment of up to 8.7% of the Currently Outstanding Shares of Common Stock (as defined in the Option Agreement) of MoviePass, giving effect to the Closing. The Option may be exercised by Helios until 5:00 p.m. Eastern Time on the thirtieth day after it receives MoviePass’ audited financial statements for the years ended December 31, 2016 and 2015 and the reviewed unaudited interim financial statements for the periods ended September 30, 2017 and 2016. In the event Helios exercises the Option in whole or in part prior to the Closing, then MoviePass will issue Helios a subordinated convertible promissory note (the “Option Note” ), in substantially the same form as the MoviePass Note, in the principal amount equal to Helios’ additional investment and, immediately upon the Closing, MoviePass will issue the amount of shares of its common stock to Helios underlying the Option Note, and upon such issuance the Option Note shall be deemed satisfied in full.
Notwithstanding the hype, free PR, and attention of market speculators, this looks like an incredibly overvalued stock.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: HMNY is a member of the Seeking Alpha Corporate Visibility program. Learn more
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