HMNY: Helios and Matheson Analytics Analysis and Research Report

2018-05-21 - by Asif , Contributing Analyst - 803 views

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Business Overview

The company provide high quality information technology, or IT, services and solutions including a range of technology platforms focusing on big data, business intelligence, and consumer-centric technology. More recently, to provide greater value to stockholders, the Company has sought to expand its business primarily through acquisitions that leverage its capabilities and expertise.

As of March 31, 2018, the Company owned 81.2%, and as of the date of this report the Company owns 91.8%, of the outstanding shares of MoviePass (excluding outstanding MoviePass options and warrants). MoviePass is the premiere movie theater subscription service in the United States which provides its subscribers the ability to view up to one new movie title per day for one monthly subscription price. The company's more than 2 million subscribers have access to see films in over 91% of U.S movie theaters.

By the end of April 2018, the company implemented certain measures to promote the fair use of its MoviePass subscription product, which the company believe should improve its cash flow significantly.

These measures include a technological enhancement allowing subscribers to log in on only one mobile device, which prevents MoviePass subscribers from sharing their accounts with non-subscribers, in order to prevent unauthorized account access. The Company has also instituted a policy allowing subscribers to see a movie title only once per subscriber using the MoviePass subscription which, coupled with its new ticket verification software, has reduced usage significantly by eliminating suspected fraud and reselling of tickets.

Where users decide to pay separately outside the MoviePass service to view a particular movie title again, they still received value from their MoviePass subscription and will have demonstrated their willingness to go outside of the subscription to spend further on box office for that title, in a manner that benefits multiple parties (the studio, exhibitor, consumer, and MoviePass).

Based on early results from these implementations, the company believe these enhancements will help to reduce usage and its ticket costs.

In addition, by returning to its $9.95 per month unlimited MoviePass subscription, enabling subscribers to see up to one new movie title per day, the company believe its subscriber acquisitions will continue to increase for the foreseeable future.

At the same time, its offering of a 4-movies-per-month capped plan as part of a special, limited time offer with one of its strategic partners; and its current offering alongside its unlimited offering of a 3-movies-per-month capped plan allows it to obtain statistically large sample sizes to create short- and long-term analyses about consumption and usage and ticket spend for each of the various cohorts, which enables the Company to continue to make data-driven decisions.

According to an independent online survey from March 14 to March 19, 2018 of over 1,500 moviegoers ages 18-74, including an oversample of 439 MoviePass subscribers, conducted by the National Research Group (NRG), 83% of MoviePass users are very satisfied with the service, which is above any other subscription services (Netflix: 80%, Spotify: 78%, Amazon Instant Video: 69%, Sling: 68%, and Hulu: 67%).

Also according to the NRG report, MoviePass subscribers are twice as likely to attend movies on opening weekend; MoviePass subscribers saw an average of 6 more movies in the past 6 months than non-subscribers; and MoviePass subscribers are 38% more likely to decide what to see after arriving at the theater, which the company believe means that MoviePass continues to have the ability to drive its subscribers to particular movie titles over others, and is important to continuing to establish MoviePass as a marketing platform for independent distributors and studios.

Also according to the NRG report, MoviePass' subscriber base is an influential one – 49% use Instagram daily (compared to 33% of non-subscribers) and 25% use Twitter daily (compared to 15% of non-subscribers) – and the vast majority state that they would be willing to pay more for the service: only 8% state that they would cancel if the price were raised to $15 per month and the number only increases by 12% (to 20%) if the price were raised to $20 per month, suggesting a relatively inelastic demand curve for the product and value offering.

Brand recognition continues to surpass its expectations. According to the NRG report, nearly half of all moviegoers are already aware of the service. 42% of non-subscribers don't subscribe because they don't know enough about MoviePass and 35% of non-subscribers don't subscribe because they are not sure how the service works. 34% of non-subscribers would be very likely to subscribe after learning more about MoviePass, which suggests a large market opportunity as MoviePass has begun to advertise using its strategic relationship with iHeartMedia – to reach non-subscribers in lower (movie ticket) cost markets to educate them about the product.

As Helios and Matheson Analytics is aware of its subscribers' appetite for certain enhancements and upgrades in the platform (according to the NRG report, 72% of subscribers would pay to upgrade to see a movie in a premium format such as 3D), the company plan to introduce new add-ons, including a variety of features/functionality and plans: namely, Bring-a-Friend, Upgrade to Premium Formats, and Family Plans.

With regards to Bring-a-Friend functionality, the company plan to allow MoviePass to begin to monetize beyond its subscriber base and prove to studio and exhibition partners the impact of its so-called "halo effect," namely, that MoviePass subscribers are more social and tend to both influence their friends to go to the movies more (according to the NRG report, 47% are recommending more movies to friends) and according to its own self-reported exit surveys its subscribers tend to go to the movies with friends, many of whom are not MoviePass subscribers. The company believe this functionality will allow for it to quantify the lift on theatrical revenues to a greater degree than Helios and Matheson Analytics has thus far been able.

The company expect that the family plan will also provide greater convenience for families to sign up together, and lead to a greater rate of growth for subscriber acquisition, given one decision maker would be capable of paying for multiple users.

Helios and Matheson Analytics has now established relationships with studios, exhibition, and media agencies – and have begun monetizing not just from within the industry (endemic: studios/exhibition), but also from outside the industry (non-endemic: brand partners from outside the theatrical entertainment industry) who are interested in connecting with the MoviePass subscriber base.

MoviePass has, to date, monetized marketing services with two large Hollywood studios, conducted sanctioned tests with multiple others, and has also monetized its marketing and data services with at least six other independent distributors. For the quarter ended March 31, 2018, the Company recorded $1.4 million from these new revenue streams. The company believe its technology and subscriber base provides it with a unique ability to target moviegoers both geographically and based on their viewing tastes.

Lastly, MoviePass Ventures, the Company’s wholly-owned subsidiary, has consummated two strategic transactions in films: “American Animals” and “Gotti”. Through these two transactions, MoviePass Ventures is entitled to participate in revenues from the theatrical window, rentals and other downstream and ancillary revenue streams: subscription-video-on-demand (SVOD), transactional-video-on-demand (TVOD), airline, and foreign sales. The Company expects that these transactions will also result in paid marketing services arrangements for MoviePass. MoviePass Ventures' investments in American Animals and Gotti have garnered international media attention and the company believe, continue to bolster MoviePass' brand recognition.

Recent Developments

In January 2018, pursuant to a securities purchase agreement entered into by the Company and an institutional investor (the “Investor”), the company sold and issued senior convertible notes in the aggregate principal amount of $60,000,000, consisting of (i) a Series A-1 Senior Bridge Subordinated Convertible Note in the aggregate principal amount of $25,000,000 and (ii) a Series B-1 Senior Secured Bridge Convertible Note in the aggregate principal amount of $35,000,000 for consideration consisting of (i) a cash payment in the aggregate amount of $25,000,000, and (ii) a secured promissory note payable by the Investor to the Company in the aggregate principal amount of $35,000,000.

In February 2018, the company satisfied all of its obligations due under its Senior Secured Convertible Notes issued to the Investor on August 16, 2017 (the “August Notes”); therefore the August Notes have been extinguished.

As of March 31, 2018, the Company had no unrestricted principal outstanding under the Senior Convertible Notes issued to institutional investors on November 7, 2017 and January 23, 2018. As of March 31, 2018, there remained $114,350,000 in restricted principal for which a corresponding amount of principal under the investor notes remains to be paid to the Company by the holders of such convertible notes,

In March 2018, the company announced that its Board of Directors approved a plan to spin-off its wholly-owned subsidiary, Zone Technologies, Inc. (“Zone”). Following the spin-off, Zone would become an independent publicly traded company that the company would expect to also be listed on Nasdaq. The spin-off is subject to numerous conditions, including, the effectiveness of a Registration Statement on Form S-1 to be filed with the SEC and the approved listing of Zone’s common stock on Nasdaq.

Pursuant to the spin-off, the company plan to distribute shares of Zone common stock as a dividend to persons who hold common stock of Helios and Matheson as of a record date to be determined. Helios and Matheson expects to set a record date to determine the stockholders entitled to receive shares of Zone in the spin-off for approximately 20 to 40 days before the effective date of the spin-off. Holders of any convertible notes and warrants of Helios and Matheson outstanding as of the applicable record date may be entitled to participate in the dividend of Zone shares in the spin-off in accordance with the terms of such notes and warrants. The strategic goal of the spin-off is to create two separate companies, each of which can focus on its own strengths and operational plans and be publicly traded. There is no assurance that the company will be able to complete the spin-off, and the Company’s management may at any time decide not to proceed with the spin-off.

In April 2018, the company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Oath Inc. (formerly, AOL Inc.), a Delaware corporation and subsidiary of Verizon Communications (“Oath”), pursuant to which the company completed the acquisition from Oath of certain products, rights, technology, contracts, equipment, data and other assets related to the “Moviefone” brand (the “Moviefone Assets”). The purchase price for the transaction consisted of: (a) $1.0 million in cash, (b) the issuance of 2,550,154 shares of its common stock, par value $0.01 per share (the “Common Stock”) and (c) the issuance of warrants (the “Oath Warrants”) to purchase 2,550,154 shares of Common Stock at an exercise price of $5.50 per share. In connection with the Purchase Agreement, the Company and Oath also entered into a Lock-up Agreement (the “Lock-Up Agreement”), pursuant to which Oath may not dispose of any of the securities purchased under the Purchase Agreement until April 4, 2019, subject to certain limited exceptions, and a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which Helios and Matheson Analytics is required to cause the effectiveness of a registration statement covering the resale of the shares of common stock issuable upon exercise of the Oath Warrants by April 4, 2019.

The above discussion does not purport to be a complete description of the Purchase Agreement, Lock-Up Agreement or Registration Rights Agreement and is qualified in its entirety by reference to the full text of the Purchase Agreement, Lock-Up Agreement and Registration Agreement.

Future Liquidity and Capital Resources

The company's primary sources of liquidity are cash on hand, proceeds from subscription revenues and proceeds from its equity offerings. As of March 31, 2018 the company had cash on hand of $42.5 million and approximately $24.4 million in accounts receivable mostly related to subscription revenues. In addition, in the three months ended March 31, 2018 the company issued common stock and warrant units and received proceeds of approximately $96.9 million, net of associated expenses. The company filed with the SEC, and the SEC declared effective, a universal shelf registration statement of up to $400.0 million worth of registered equity securities, of which the company utilized approximately $105.0 million and $30.3 million in offerings in February and April of 2018, respectively. Under this effective registration statement, the company may issue registered securities, from time to time, in one or more separate offerings or other transactions with the size, price and terms to be determined at the time of issuance. In April 2018, the company entered into an Equity Distribution Agreement (the “Sales Agreement”) with Canaccord Genuity LLC (“Canaccord”) pursuant to which the company may issue and sell from time to time shares of Common Stock having aggregate sales proceeds of up to $150.0 million through an “at the market” equity offering program under which Canaccord acts as its sales agent. Helios and Matheson Analytics is required to pay Canaccord a commission of 5% of the gross proceeds from the sale of shares of Common Stock under the Sales Agreement.

As of March 31, 2018 the Company had approximately $84.9 million in deferred revenue related to subscriptions of its MoviePass service. Deferred revenue represents funds received for monthly, quarterly, semi- annual and annual subscriptions plus amounts associated with gift card purchases. MoviePass has experienced service costs over and above subscription revenue in the fulfillment of subscription services mainly for ticketing and related service fees. Included in the deferred revenue balance is approximately $11.2 million of funds allocated to service future ticket fulfillment associated with deferred revenue on the acquisition date.

The Company maintains relationships with several payment processing vendors. The company's primary merchant processor maintains a reserve fund of a portion of the payments received for annual and other extended term subscription plans. As of March 31, 2018 the amount on deposit with its merchant processor was approximately $18.0 million. This amount is classified as accounts receivable on its balance sheet and is expected to be disbursed to the Company during the course of 2018. The Company intends to use these funds for ticket fulfillment and other general operating costs.

During the three months ended March 31, 2018 and 2017, the Company has received $25.0 million and $3.0 million, respectively, from complex convertible notes containing derivative features associated with conversion rights and stock purchase warrants. In addition, the convertible notes provided for interest to be paid on borrowed and or committed funds as the case may be, generally for minimum periods even when such funds are not outstanding. During the three months ended March 31, 2018 the Company has recognized derivative gain of $8.6 million associated with these securities which in many cases are valued based on the underlying equity securities required to satisfy such derivative features upon exercise or conversion. During the three months ended March 31, 2017, the Company recognized derivative gain of $0.9 million associated with derivative securities. Additionally, during the three months ended March 31, 2018 and March 31, 2017, the Company has recognized non-cash interest expense of $35.0 million and $3.1 million, respectively, associated with these convertible notes and committed funds which have predominantly been settled through the issuance of shares of the Company’s stock. In addition, the Company incurred approximately $7.7 million, in cash paid for interest associated with outstanding notes and committed funds during the three months ended March 31, 2018.

At March 31, 2018 the Company had outstanding approximately $0.7 million face value of convertible notes payable and derivative liability balances of approximately $0.7 million associated with the conversion features of convertible notes.

The Company has experienced net losses and significant cash outflows from cash used in operating activities over periods presented in this report. As of and for the three months ended March 31, 2018, the Company had an accumulated deficit of $184.3 million, a loss from operations of $107.7 million, and net cash used in operating activities of $68.4 million. As of and for the three months ended March 31, 2017, the Company had an accumulated deficit of $49.8 million, a loss from operations of $4.4 million, and net cash used in operating activities of $2.5 million.

The Company expects to continue to incur net losses and have significant cash outflows for at least the next twelve months. The attainment of profitable operations is dependent on future events, including obtaining adequate financing to fulfill the Company’s growth and operating activities and generating a level of revenues adequate to support the Company’s cost structure. Management has evaluated the significance of the conditions described above in relation to the Company’s ability to meet its obligations and concluded that, without additional funding, the Company will not have sufficient funds to meet its obligations within one year from the date the condensed consolidated financial statements were issued. These factors raise substantial doubt about the Company’s ability to continue as a going concern. While management plans to raise additional capital from sources such as sales of its debt or equity securities or loans in order to meet operating cash requirements, there is no assurance that management’s plans will be successful.


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