Helios & Matheson (HMNY), majority owner of MoviePass, has had a rough ride as of late especially after it's most recent financing. As a result, the bear thesis seems to be gaining steam as written about here, here, and most recently here.
I continue to believe in the bull thesis of the stock as I've written about here, here, and here; but many investors are hurting right now so I reached out to CEO of HMNY, Ted Farnsworth, to give him a chance to respond directly to investor concerns.
My colleague from StoryTrading, Joshua Kim who is a Six Sigma Practitioner, Master Black Belt, and a Business Operations/Continuous Improvement expert, joined Ted and I on this call. Our questions were carefully curated from a group of over four dozen shareholders to address top investor concerns. It's important to note that Ted did not receive the questions in advance and he answered everything without hesitation.
On Having Skin in the Game...
Ben: You have previously mentioned you put your own money into the company. Can you comment further on that?
Ted: Yes. It was when I put in money to fund RedZone. I was the only shareholder of RedZone (Zone Technologies) and merged it into Helios.
Ben: So your investment in RedZone turned into HMNY shares?
Ted: Correct, I converted all my RedZone shares into HMNY shares.
Ben: I know you have a lockup on most of your shares until January of 2019, is that correct?
Ted: Correct, I have a lockup on my shares under my employment agreement shares and I’ve never sold a share of Helios.
Ben: What is your personal goal for your investment from the viewpoint of a shareholder? How large do you think HMNY can get?
Ted: I always believed from day one that MoviePass, even on its own, if we did it right and we got to massive subscribers that it would potentially have a multi-billion dollar market cap and my goals and sights have not changed at all. They’ve only been encouraged to see what’s happened along the way and to see how quick it’s moving.
Ben: To clarify Ted, are you saying that the quick initial ramp up to millions of subscribers has changed your expectation? Are you envisioning an even bigger exit based on that type of growth?
Ted: No. I always knew it would be big growth, it just came quicker than we thought. I thought over a couple years it might be worth billions of dollars in market cap but now I think we’ll get there sooner rather than later. That’s my personal opinion. That’s why with Helios, we are constantly investing in MoviePass because the most important thing long-term for Helios shareholders is to have as much MoviePass as they can possibly have.
On Working Relationship with Mitch Lowe...
Ben: Can you tell me more about your working relationship with Mitch Lowe? What are each of you responsible for?
Ted: Mitch and I work together literally 24-7. We are constantly in contact with each other every day. I handle the marketing side and the financing side. Mitch handles all of the day to day operations and relationships with theaters. He works with all the business development teams, with all the studios. I sit in on the meetings with the studios but that’s more for me to learn. Mitch really handles all the business development and day to day operations. But at the end of the day, I let him know it’s really Mitch’s call, even on the marketing side.
Mitch Lowe (left) and Ted Farnsworth (right) at HMNY Headquarters
(Empire State Building, New York, NY)
Ben: Do you see this as a temporary arrangement or, if and when MoviePass trades independently, do you see yourself still having the same role?
Ted: 100%, whatever happens with MoviePass, I‘ll still be involved in the day to day because that really is my own passion on the marketing side. Both of our offices will be merged together in New York so it will be Helios and MoviePass even if they are separate we will still be in the same offices with everybody.
Ben: On that note, did you get a dedicated office for the MoviePass staff yet?
Ted: We have to get more space in the Empire State Building to get all the staff in there and we may be looking at another office in Manhattan for additional staff.
On Proxy Investment & MoviePass Trading Independently...
Ben: In speaking with hedge funds, high net worth individuals, and even retail investors; many will not even take the time to research the opportunity simply because they will not consider a proxy investment. Are you aware of this dynamic and if so, what are your plans to address that?
Ted: I know that exists but I think that this will be resolved over the next several weeks.
Ben: Why is the company at this point not able to tell us what their plans are? Is there a legal reason it can’t be disclosed until it happens?
Ted: Yes. Exactly. We’ve gone through a rigorous process and we’ve looked at what’s in the best interests of MoviePass and HMNY shareholders and what’s in the best interests of MoviePass itself and we’ve had a lot of advice from Wall Street to look at all the different scenarios. As soon as we figure out what we will do, we'll announce it to the public.
Ben: So it sounds like you’ve already looked into everything and now it’s only a matter of certain paperwork that needs to be completed or filed before the world can know.
Ted: I agree. I think that’s a correct statement.
On RedZone Map...
Ben: Can you tell me what the status of RedZoneMap is? Is money still being invested in that? Most of the value of HMNY stock is in MoviePass. Why fund a potential money-loser when MoviePass already has its own large capital requirements? Can you comment on that?
Ted: Sure. I think you’ll see in the near future why we have kept still funding RedZone and Zone Technologies.
Ben: So no plans to shut that down or sell it?
Ted: No. Not at all. Not at all.
Ben: I think most informed investors realize that significant capital investments are needed to bring the MoviePass business plan to its fruition so we don’t mind seeing these offerings and we fully expect more offerings in the future however what’s really irked people the wrong way are these deep discounts. The last two offerings were 30% below market prices with very favorable terms for the warrants. Why was the company not able to get better terms on these offerings?
Ted: Well we tried. I think the last one you look at was right after the DOW took a massive dump. It doesn’t come from a lack of trying. No one is getting more dilution than myself. When the markets go south, you aren’t raising any money and that’s not a predicament we wanted to be in. We could have raised a lot more money but we shut it off at 105M. And that’s a decision that Mitch and I made together. Believe me, we tried to raise it at a higher number but we weren’t able to.
Ben: Do you think there is anything you could have done that you haven’t been doing to get more competition in the process?
Ted: No. I think we had a lot of competition in the process even with other bankers outside of Canaccord. But most of the large investment banks don’t talk to anybody unless you are north of $500M in market cap and even that’s small for them.
Ben: Was there any thought of raising money on the way up when the stock went from $3 to $38? We all knew capital was needed. Why weren't there offerings at that time?
Ted: Here’s the thing. We did a private placement in November last year at a conversion price of $12.06 and we used our shelf registration statements for public offerings as soon as they became available, so we did our best with what we had to work with. Here’s the thing with the run up to $38, sophisticated investors knew it was a short squeeze. We tried when it was going from $15 to the $20s but the institutional investors we were talking to; they all saw the run up and they believed it was a short squeeze and way over-valued at that time.
Ben: If MoviePass had unlimited capital in the bank right now, how would you invest those additional funds?
Ted: Obviously on growth here in the states but probably more on the international side which we are looking at all the time and we’ve been approached by different groups around the world to do MoviePass in different parts of the word. We would definitely accelerate that. And we would look at acquisitions of theaters. Chains, such as AMC (AMC), Regal (RGC), Cinemark (CNK), etc.. Because I think the whole system needs to be disrupted.
Ben: Do you want to expound on that a little more? This is the first I’m hearing about acquiring theaters.
Ted: Well this is with unlimited money as you are saying - a big hypothetical. If you do do that, the one thing we understand is whoever controls the theatrical release of a movie really controls the keys to the kingdom. For example, there would be different ways to bring original content from Netflix (NFLX) and Amazon (AMZN) in a much bigger play. I think you could incorporate Starbucks (SBUX) and ShakeShack (SHAK) and really build it out for a much bigger theatrical experience.
Ben: There have been articles published questioning your trustworthiness due to past associations and questionable investments. Some claim that the recent below market offerings and your compensation package based solely on market cap confirms this narrative. How do you respond to that?
Ted: I respond to that like this: Any of the past public companies (you can look at the filings), I never sold one share. I don’t put money into a company like that thinking I’m going to lose my personal money. How is that unethical or questionable? I ride it through the whole storm and if it works it works and if it doesn’t work it doesn’t work. I think one of the articles you’re probably looking at is the Bloomberg article. I gave the writer plenty of other companies I had invested in on the private side and they had no interest in that. They just wanted to write about the ones that didn’t work.
On Stock Performance…
Ben: There are many retail investors who really want to support and believe in MoviePass. However, many of them are down 50, 60, even 80% from their initial positions. Is there anything you’d like to say to these investors directly?
Ted: There are choices out there if you are looking for a short-term trading profit. I believe this is a long-term play. I’m talking a year, two years, three years, five years from now some people might be saying “why did I sell?” I mean, look at Amazon when they first came out. I remember when I was at a conference years ago when Jeff Bezos was out there with the stock price around $4. It dropped from its original IPO price and they were burning cash. Look at Amazon now. Jeff Bezos looks like a genius. It’s not about being a genius, it’s about being persistent, never giving up and staying focused on what you’re investing in, and knowing it would work out over time. I feel very comfortable looking at short-term, mid- term, and long-term goals looking at where the company is going, but is there going to be ups and downs and valleys? Absolutely. So if you’re a day-trader and you’re in there in-and- out you’ll be able to make money here and there but to me I look at it as more of a long-term play.
To me, it was always the Robinhood Story of what we did with MoviePass. It is the first time the retail investors have an opportunity to buy into a company where the valuation is hundreds of million of dollars that has the potential to be in the billions of dollars in valuation. Venture capitalist of the world are putting all the money into the Ubers of the world or the Spotify and then they go public at a multi-billion dollar valuation. All the backers made money already. The VCs all made money and the company executives all made money. For me, we are even disrupting the way that money is being invested. I believe MoviePass is a unicorn company. But to answer your question, I never want to see anybody get hurt. Look, nobody likes to see their stock go down, including myself, but I also think it is a long-term plan with a long-term play.
Josh: You’re growth is unprecedented. You’ve grown [number of subscribers] faster than any of the entertainment businesses based on a subscription model. Why do you think Wall Street is so unkind to you in terms of price action and the current price point? What’s you’re theory?
Ted: One. They don’t understand the revenue streams. It’s one thing for Mitch and I to say “Wow look at all these current and potential revenue streams in addition to subscriber revenues but if the Street doesn’t understand the vision, it doesn’t do us any good. Two. When a reporter writes, “I love MoviePass, I went to eight movies last month”. An average person doesn’t go watch eight movies. When a person reads that article they immediately think; “Everybody must be going to eight movies a month, or twenty movies a month” It’s just simply not true. People basing their judgement on a small sample size that is only anecdotal is a big portion of this misunderstanding. We are working on ways to show our data to people to help clarify the MoviePass vision – Obviously, there are things we can disclose and things we cant. I think that even in the short-term, I think there will be a lot of things that come out, even in the next few weeks that will explain things in an easier fashion to follow. Obviously it’s easier for me or Mitch to look at it and say “wow look at all these revenue streams”, but if the street doesn’t understand it, it doesn’t do us any good.
On Key Metrics and Profitability...
Josh: We actually performed a grass roots survey with one simple question of “How many months have you had MoviePass, and how many movies have you watched since?” Using the data, we plotted the usage distribution curve, we had anywhere from 1.1-1.3 movies per month. Yes there were outliers who watched 10 movies but there were also plenty of people who didn’t watch any. Any plans to publish this sort of data to let the data do the talking?
Ted: Yeah we do, we have plans on doing that. I think you’ll see some things out there very soon. The other thing, we are beyond swamped, we have only been doing this for 5-6 months, even from the operational standpoint. I would not be diluting myself by 100% if I did not believe it in every bone and thread in my body that this could be a multi-billion dollar company. I think Hollywood is really starting to get it, especially the studio side. The more subscribers MoviePass has, the more leverage we could have, and more people understand it. People will have to bear with us on the way. There are definitely growing pains.
Josh: Data talks, this is a unicorn, we are all looking forward to this data.
Ben: Mitch has talked about this data in public comments, as the users age, they will watch less and less movies every month. The other important factor is that the mix of users will shift towards more casual users as the brand grows, whereas in the early stages, it was avid-user heavy. These are the two key data points everyone is looking for so we can figure out when you will be cash-flow positive.
Ted: The near term goal is to be cash-flow positive. Where we are not burning through the cash, not profitable, but not burning through. We plan to release more information on a lot of those things as soon as we can.
On The MoviePass App...
Ben: Do you have a vision for the App, beyond just purchasing tickets? My colleagues and I envision disrupting several sectors, Fandango, Flixster, reviews, ratings, etc.
Ted: All of the above, we are considering all of those options. How do you really do night at the movies and make revenue, how does that work. You’ll see soon enough.
Ben: Is there a possibility that even non-subscribers could download the app and see all the content, reviews, even purchase single tickets?
Ted: That has been 100% my goal from a marketing standpoint from day one. To be like a Fandango front-end, you download for free, look at the movies, look at the theaters, look at restaurants around you and all of a sudden you are at the theater and we hit you with a ping, “hey this movie is playing you might like it, and by the way it’s on MoviePass tonight, sign up here”. We are working on all of that. We are still trying to catch our breath, I can’t explain that enough to people. As quick as we hire people and bring them on, top-notch people, what MoviePass has done a great job on, now we are attracting much higher end talent who want to be a part of MoviePass.
Ben: There has been some significant downtime for the App since the release of the new version, what is the company doing to remedy this?
Ted: That would be a better question to ask Mitch on the operational side.
Ben: Regarding the latest app, I know you outsourced this to Fueled...
Ted: We outsourced some of it to Fueled, but we did most in-house.
Ben: Do you envision requiring an additional significant capital investment to build out the in-house technology team?
Ted: No. Wait let me back up, what do you consider significant capital? I think it’s going to be a lot, but we got a lot already in place, we got top-notch people, but its not anything that would scare me by any stretch. Two of our weakest points are our customer service and technology. Definitely not marketing, not signing people up, or having a love for the brand. I think the customer service side, you will read about in the next week or so about how we hired a top-notch person that has done customer service for some major consumer brands, which will really take MoviePass to a whole different
On First Earnings Call...
Ben: Regarding the next earnings report (for Q4), do you have any idea when they will be? Will you have a conference call planned for that?
Ted: We are talking about that internally, that would be our first conference call. We’re discussing when we would do it and how it would work. We are looking at a tentative date of early to mid-April.
As I previously wrote about here, there are four pillars in an investment decision: Brand, Industry, Management, and Moat. As long as MoviePass continues to be a proxy investment through HMNY, the "Management" pillar compels us to make an assessment of Ted Farnsworth. I hope this interview will help investors do just that.
Next, we look forward to interviewing Mitch Lowe, CEO of MoviePass, as we endeavor to learn all we can about the MoviePass opportunity.
Disclosure: I am/we are long HMNY.
Additional disclosure: All participants known to me who were involved with this interview or the writing of this article have agreed to a self-imposed trading ban from time of interview until time of publication.
At the time of submitting this article to SeekingAlpha, I have a long core position in HMNY in addition to a trading position. Despite my long-term bull view on the company, I aggressively trade around a core position particularity in times of extreme volatility and I may buy/sell equity and/or options at any time based on headlines, short-term expectations, or based on price action alone. Given the dynamic and fast-changing nature of this opportunity, I may change my sentiment at any time without notice. My opinions expressed in this or any SeekingAlpha article or comment should not be construed as investment advice and are for entertainment purposes only. HMNY is a highly risky stock. Consult with a financial adviser and invest only what you are willing to lose.
Additional credit: Ben Resnick for transcription assistance and StoryTrading Research Group.