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MoviePass auditor has doubts about the company’s business model after significant losses

MoviePass auditor has doubts about the company’s business model after significant losses

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But CEO Mitch Lowe has said the company will be profitable by 2019

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Photo by Vjeran Pavic / The Verge

MoviePass is reportedly burning through its funding, even as it continues to grow. An independent auditor for MoviePass’s owner, Helios and Matheson Analytics, said it had “substantial doubt” about the company’s ability to remain in business, according to a report from Business Insider.

In Helios and Matheson’s annual report, the auditor writes that MoviePass has “negative cash flows from operating activities,” according to BI. While it’s very common for startups to operate at a loss, the concerns dampen MoviePass CEO Mitch Lowe’s earlier predictions that the company would be “cash-flow positive” by 2019.

Helios and Matheson CEO Ted Farnsworth told BI that MoviePass needs to raise more money to remain in business, which MoviePass has already relayed to investors.

The subscription service, which allows users to see one movie per day at participating theaters for a flat rate, launched in 2011, but it ballooned in size after it dropped its prices dramatically in 2017. In February, the company reported it had grown to more than 2 million subscribers. In August 2017, MoviePass sold a majority stake to Helios and Matheson and shifted its pricing model, from a tiered rate beginning at $15 to a flat monthly rate of $9.95.

The price drop lured thousands of new subscribers, especially in big cities where the cost of a single movie ticket is often higher than MoviePass’s monthly cost. At the end of last year, the company announced it had more than 1 million subscribers. The Verge’s Nick Statt saw 14 movies for just under $30 in San Francisco with MoviePass, when it would’ve normally cost him an equal amount to see just two movies. But that also means that MoviePass is losing money on every ticket purchase because it pays the theaters full price.

“MoviePass currently spends more to retain a subscriber than the revenue derived from that subscriber and MoviePass other sources of revenue are currently inadequate to offset or exceed the costs of subscriber retention,” the report reads. “This results in a negative gross profit margin. MoviePass expects its negative gross profit margin to remain significant until MoviePass can sufficiently increase its other sources of revenues to offset the losses or achieve substantial economies of scale.”

Currently, MoviePass’ movie-a-day model is unavailable to new subscribers, because the company is promoting iHeartRadio with a bundled subscription, which only allows for four movies a month. A MoviePass representative says the previous version of MoviePass will eventually be available to new subscribers again.

Over the past few months, MoviePass has offered a few different explanations as to how it plans to make money. Last year, Lowe told Variety that the company needed to get more subscribers in places like “Kansas City and Omaha,” where average ticket prices are lower than in Manhattan and LA. Farnsworth told Wired that MoviePass can sell the data it obtains for targeted marketing efforts for movie studios. In the past, MoviePass has sent subscribers promotional emails and push notifications for movies like I, Tonya and Death Wish, while blocking movies like Red Sparrow for users in some markets.

The company also seems to be banking on user loyalty and trying to use its subscribers as leverage for revenue-sharing with big theater chains like AMC. According to Deadline, MoviePass has been trying to get a $3 cut of tickets it sells at AMC theaters, plus 20 percent of concession profits. But, as The Verge’s Bryan Bishop wrote in January, MoviePass’ claims about its importance to theaters have been significantly overstated.

Helios and Matheson reported a loss of $150.8 million for the last financial year, compared to just $7.4 million in 2016. Farnsworth told BI the “gross loss” was really only $10 million cash, and the rest was in “derivative accounting.”