Last Friday, I published this blog, which included the following conclusions:
"Recent actions suggest a private offering of MoviePass shares could be next; meaning no additional HMNY offerings to fund MoviePass."
"The prospects of a MoviePass IPO are still on the table and will maximize shareholder value for HMNY investors."
At the time, the increasing odds of such an outcome prompted me to significantly increase my position in HMNY.
But the calculus today changed significantly.
The drama started this morning when a Variety article quoted Ted Farnsworth as saying the company has secured a $375M line of credit. The news was explosive as Benzinga reported here and resulted in me adding many additional shares. This news also prompted many bears who I am in touch with to buy the stock.
However, about an hour later, it was reported by Benzinga, that this $375M was actually "Leftover funds from [the] shelf offering" according to comments Ted made to Benzinga.
WOW! That changed everything. Not only for today but it completely killed the thesis I published last week. Obviously this news reversed the daily momentum as traders rushed for the exits including me.
To be clear, a Line of Credit has NOTHING TO DO WHATSOEVER with a shelf offering. One is dilutive and the other is not! But I didn't just sell the trading shares I bought when the #FakeLineofCredit hit; throughout the day, I was selling some of my core position as well. Here's why:
Ted's presumption that he is "sitting on hundreds of millions of dollars of dry powder" is now clearly linked to the shelf offering and the remaining $375M which he also refers to as a "Line of Credit". This explains everything! As I wrote about last week, Ted has been going around at investor conferences saying "No more dilutive offerings". These comments led me to believe that future financing would come from MoviePass private offerings which would be less dilutive to HMNY. But now we can better understand Ted. Ted thinks that any offerings under the shelf does not qualify as "additional dilution". In his mind, that money is already in the bank. It's "dry powder" and selling stock to access it is just a formality which doesn't result in additional dilution. This is how he can make the claim of no more offerings, line of credit, and dry powder. What's this all mean?
It means there 100% will be an HMNY offering coming up. Now until a week or so ago, I was expecting this anyway but I significantly increased my position last week in anticipation of a private offering next. I therefore reduced my position today accordingly.
The Variety article also included the following passage:
-----Farnsworth rules out spinning off MoviePass from Helios and orchestrating an initial public offering. “We’re so busy doing what we’re doing that we don’t have time to do that,” he says. However, he is considering rebranding Helios’ public listing to reflect its ownership of MoviePass because he believes the subscription service is a better known brand.-----
Oops. There goes my other conclusion. While private MoviePass investors still want to IPO, as I wrote about last week, Ted holds all the cards because of the anti-dilute clause, and it's now clear his intent is to buy the remaining 8% of MoviePass and change the name of the company. Not the worst outcome but I wonder how long this will take. Seems to me this will take at least a few more months and will not be resolved before the next offering.
This means the next offering could happen on very bad terms just like the last.
I want to add an additional comment regarding Ted's "perspective" that offerings under a shelf is not additional dilution. I find it difficult to digest this point of view positively. It's either dishonesty or pure ignorance on Ted's part and it's reduced my trust in management.
Despite my heavy selling today, I'm still long - very much so. HMNY still represents over 10% of my portfolio now but for such a speculative stock with proxy still not resolved, it's likely too high. I will be looking for spots to sell additional shares over the coming days and weeks (hopefully when positive news hits - 3M subscribers anyone??) to bring my position to <5%.
I likely won't increase my position from there again until proxy is resolved.
My long-term thesis has not changed and I intend to keep a net-long position. I still believe this is a $0 or $50/$100 VC type of investment but the risk has increased for me due to lower trust in management so I will simply reduce my position accordingly.
Disclosure: I am/we are long HMNY.
Additional disclosure: 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.