AMC: Apes Will Run Wild Again (NYSE:AMC)

There’s a scene in the Avatar: The Way Of The Water movie where the protagonist Jake Sully, towards the end of the third act, has to face the villain in a fight to the end as the ship they’re in sinks and as the fate of his family whose also on the ship remains uncertain. AMC Entertainment’s (NYSE:AMC) current near-term predicament mirrors Jake with the company under pressure from consecutive months of high cash burn and dwindling cash reserves now faces down a shareholder lawsuit that could materially hamper its ability to raise the liquidity required to remain a going concern.

The situation is critical. Indeed, AMC’s recently reported fiscal 2022 fourth quarter earnings saw the company realize cash outflows from operations of $33.3 million, down from an inflow of $46.5 million in the year-ago quarter but an improvement sequentially from a loss of $223.6 million in the year-ago quarter. AMC’s cash and equivalents as of the end of the fourth quarter fell to $631.5 million, down from $684.6 million in the third quarter and from $1.6 billion in the year-ago comp. What happens to a business that’s not generating cash from its operations and whose source of funds is increasingly drying up? This is the question AMC’s army of Apes and shareholders are now asking. The company’s ability to raise funds by taking on more debt is severely restricted with a total long-term debt position of $5.14 billion as of the end of the fourth quarter.

Hence, AMC has to lean on more dilutive equity raises to remain a going concern. It simply faces no other options bar a movie slate that’s a box office equivalent of Avengers: Endgame released every week for a year. Attempts to tap its equity for liquidity have been complicated with shareholders previously being opposed to previous attempts by AMC to expand the number of outstanding shares.

In Pursuit Of The Mother Of All Short Squeezes

Essentially, AMC is limited by its corporate charter to only authorize 524,173,073 common shares. The company has hit this limit and has faced strong opposition from its broad retail shareholder base to expanding this ceiling. For the self-described Apes in the forever pursuit of what’s been called the mother of all short squeezes, a normal vote to expand the number of shares the company is able to issue has been a non-starter. Hence, the lawsuit to stop the conversion of its preferred shares (NYSE:APE) to common equity presents an existential threat to the company. To be clear here, AMC’s current cash position is insufficient to maintain going concern beyond the short to medium term and the company is in desperate need of more shares to sell. Fiscal 2022 cash burn from operations stands at $628.5M, or around $157.13 million per quarter when the seasonal effects of big movie releases are smoothed out.

Attempts to override opposition to increasing the upper limit of authorizable shares led to an ingenious strategy to issue more common shares via the backdoor of a convertible preferred stock not subject to the cap. This was followed through with a now-approved shareholder vote to initiate a 1-for-10 reverse stock split. However, a lawsuit by a little-known shareholder to declare the preferreds invalid and block the conversion is set for a late April hearing. If the lawsuit is successful then AMC will be faced with four quarters of cash runway left as there are simply no more adequate avenues to raise a substantial level of cash. However, bulls would be right to flag that the 2023 movie slate is a lot stronger than last year which should drag cash burn to a more sustainable level.

Expenses And The Next Quarters Of Cash Flow

It’s encouraging that AMC has been able to better manage expenses with SG&A for the fourth quarter at $63.9 million, down from $106.4 million in the year-ago quarter. The company will need to be more aggressive to save cash as the business heads towards a vote whose binary outcome will decide its future. This comes as the large debt balance drove an interest expense of $90.7 million during the fourth quarter, up sequentially from $86.1 million as rising rates push up the variable portion of its debt burden.

AMC’s current market cap of $2.29 billion forms a price-to-sales multiple of 0.586x against fiscal 2022 revenue. This represents a near record-low multiple for the cinema operator and perhaps one of the core bull arguments against the upcoming wall of dilution and a binary outcome in their future. Critically, the long-term story here is tough. Shareholders need the lawsuit to go in AMC’s favour but at the same time, they’re set for one of the most marked periods of dilution.

I’ve historically been bullish on AMC with concerns around moviegoing in the post-pandemic era not reflected by strong box office takings. Indeed, Avatar: The Way Of The Water has gone on to become the third highest-ever grossing movie globally. If studios make great movies people will come. The 2023 box office releases have been strong with Ant-Man and the Wasp: Quantumania bringing in a substantial $206 million domestic haul. However, whether this somewhat positive backdrop will save the company is uncertain. In light of these risks, I’m switching my rating to a sell.