EmergingGrowth.com NewsWire – EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on Helios and Matheson Analytics (NASDAQ: HMNY)

Helios and Matheson Analytics Inc (NASDAQ: HMNY) has in recent months been the subject of intense and sustained criticism due to its poor share price performance. The stock has plummeted from highs of $38 in October 2017 to the current lows of $0.21 (at the time of writing) amidst growing concerns that the company doesn’t have sufficient cash flows to sustain MoviePass.

MoviePass, which is 92% owned by HMNY following a takeover in August 2017, is a subscription-based movie ticketing service that allows U.S. moviegoers to watch an unlimited number of movies at more than 90% of domestic theatres for a flat monthly fee of as low as $9.95.

Thanks to its low-cost subscription model, MoviePass has cast itself as the Uber of the movie industry. It offers a low-cost service in an industry where the average price of a ticket has been steadily increasing through the years, despite the emergence of cheaper alternatives such as Netflix (NASDAQ: NFLX).

Average price of a movie ticket has been steadily increasing through the years; Source: Statista

Why should you pay $8.93 on average to watch a single movie, while for just $10 you can watch an unlimited number of movies all through the month on MoviePass? This proposition, which is at the heart of MoviePass’s marketing strategy, is admittedly very attractive. Tellingly, MoviePass’s subscriber base exploded from just 20,000 last year to more than 3 million by June 2018.  The company further projects that it will exceed 5 million paying subscribers by end of the year.

With such an amazing growth narrative, at least from a subscription basis, why is HMNY’s stock on a freefall? Because the MoviePass pricing model is rapidly depleting the company’s cash, while offering no meaningful prospect of ever replenishing it.

Initially, the novelty and instant wild popularity of MoviePass’s low-cost subscription model aroused sharp investor interest, jolting the stock from stagnant levels of between $2-$3 in September 2017 to the $38 historic high recorded in October 2017. However, after investors reassessed the model, they discovered that it was unsustainably burning through cash. For every single movie a subscriber watches for the $9.95 flat monthly fee, the theatre still gets full price for the ticket—only that this full price is paid by MoviePass and not the moviegoer.

This means that the expansion of MoviePass’s subscriber base has been accompanied by a corresponding and substantial weakening of its cash position as it has been paying full price for each and every movie viewed by its subscribers. According to SEC filings, MoviePass burns through approximately $21.7 million in cash every month, an expenditure that is growing in tandem with its subscription base.

Toxic financing and reverse stock splits

MoviePass is basically subsidizing its users. It is taking a hit on its bottom line in order to attract and retain subscribers. To illustrate this point, its monthly lossesreached $40 million in May this year. These losses will widen even further as it continues to subsidize users in order to expand its user base. In view of the fact that the company is sinking deeper into the red with each passing month, where does it get the cash to subsidize it users? From toxic financing—that is, instruments such as convertible notes that help mobilize much needed cash but dilute existing shareholders.

If there is no alternative source of cash, convertible notes become addictive and toxic, eroding shareholder value

The problem with HMNY is that it is dependent on instruments such as convertible notes, and not exploring ways to sustainably monetize its operations. Eventually, it will get addicted—if it not already is—to toxic financing. Tellingly, after entering an agreement to issue $164 million in convertible notesin June—money that will last only a few months at the current burn rate—HMNY has yet again filed an S-3 universal shelf registration statementwith the SEC. This will allow it to sell up to $1.2 billion in equity and debt over the next three years.

For this financing strategy to be successful, HMNY needs to do two key things—a) increase the number of authorized shares to allow for the creation of a vast number of outstanding shares (which will support issuance of convertible notes and other equity instruments); b) get approval for a reverse stock split to shore up the share price above $1.00 to ensure it is not delisted from the NASDAQ (which, as a major exchange, has the kind of liquidity it needs for its cash hungry MoviePass model). Unsurprisingly, HMNY has already made clear its intention of taking these radical measures.

According to SEC filings, the company plans to convene a Special Meeting this July, where shareholders will vote to consolidate shares anywhere from 1-for-2 up to 1-for-250. The company’s management essentially wants to raise individual share prices by the multiple that is necessary in order to avert delisting from the NASDAQ, where a share price of at least $1.00 is a minimum requirement. The company also wants to increase authorized shares from 500 million to 2 billion, giving it sufficient wiggle room to raise more money through dilutive instruments.

Moreover, the company has included an “adjournment proposal” as part of the July Special Meeting agenda. This “adjournment proposal” provides for the meeting to be postponed if sufficient votes to, among other things, consolidate shares and increase authorized shares are not garnered. Clearly, HMNY is determined to bulldoze its way if necessary, reinforcing the fact that company’s management has never had shareholders’ best interests at heart. If anything, it is eroding shareholder value with impunity.

User data best play

Granted, the subscription model that MoviePass pioneered is a refreshing departure from the current movie ticket pricing model. AMC has in fact introduceda subscription model costing $19.95 a month that allows users to watch as many as three movies per week, including 3D and IMAX. However, the subscription model must not be championed at the expense of unwitting shareholders. This is the problem with HMNY in general and MoviePass in particular. Fortunately, the vast majority of the investing public are on to them. The stock is unlikely to recover, meaning HMNY could be delisted and will probably fail to raise the capital it needs to sustain the continued expansion of its user base.

The best play for HMNY at the moment is to leverage the user data it collects from subscribers. The data it has collected so far could be worth a lot to the right set of brands. Tellingly, the company earlier in the year admitted to collecting user data outside cinemas, with the CEO Mitch Lowe (who incidentally co-founded Netflix) saying that: “We get an enormous amount of information. We watch how you drive from home to the movies. We watch where you go afterwards.”

The company should pivot into advertising and other forms of marketing, as its pricing model for movies is undermining shareholders. It is instructive to note that MoviePass currently represents more than 5%of total U.S. box office receipts, with its peak weeks nearing 8% of box office. When actively advertising select films to its subscribers, box office receipts have seen weeks push to over 30%. The potential to leverage user data to push for potential partnerships and mergers with players in the entertainment industry, potentially even cinemas, is evidently immense.

The big question is whether pivoting to advertising will provoke a backlash in the form of lawsuits relating to violation of user privacy, especially in this era of more stringent data protection laws. It is still too early to tell whether this will happen or if MoviePass will even move to advertising, but one thing is clear: MoviePass as it is currently modelled can’t survive for long as a going concern.  It needs to review its prices upward or pivot into advertising using the data it has collected. Until it does either of these, the only way to make money off this stock is to short it.

Conclusion

Despite hitting what seems to be rock bottom—$0.21 at the time of writing—HMNY could slip even further if shareholders this July reject its absurd proposals to increase shares, issue more dilutive instruments and effect a reverse split. There is still room to short it until it is inevitably delisted from the NASDAQ.

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