ESPORTS ENTERTAINMENT GROUP: THE MOST EXPENSIVE ESPORTS COMPANY YOU'VE NEVER HEARD OF
eSports Industry Guest Post 009: Tomi Kovanen is a former professional gamer with broad experience throughout the esports industry (consulting, analysis, writing, operations, etc.), having worked with the likes of ESPN, Yahoo! Sports, Turtle Entertainment and ESEA.
Two years of experience in Corporate Finance/M&A at J.P. Morgan in London. Currently a CFA candidate with a bachelor's degree in Finance.
People in the industry are fascinated by the reports of North American teams being valued in the low-to-mid eight figures, and presumed multimillion dollar sponsorship deals being announced with companies like Intel, Jack in the Box and T-Mobile. Big numbers drive further media attention, making esports, in that sense, a self-fulfilling prophecy. With tons of media attention, you would think you know about the most valuable businesses in the industry.
But what if I told you there is a company that says its main business esports betting, with a valuation that easily surpasses the combined value of both ESL and DreamHack, at the time of MTG’s acquisitions?
Furthermore, what if I told you said company were the only public esports firm? Let’s dive in.
Esports Entertainment Group Inc. is listed on the OTC Markets Group exchange for small companies, using an old listing of a company called Dongke Pharmaceuticals. While the listing has existed since late 2008, the company was founded in its current form in August 2014 under the name of VGambling Inc., and later renamed to Esports Entertainment Group Inc. in an SEC filing dated April 18, 2017 (notably, despite the near-identical name, the firm has nothing to do with ESEA, the pay-to-play subscription service acquired by ESL).
Since founding, Esports Entertainment has had no revenues and has been burning cash increasingly, to the tune of roughly $250K in 2015-2016 on average, mainly on paying for salaries of its management and directors, consulting services, and on marketing expenses – despite not having a product to market, yet.
The Esports Entertainment’s business model is an online gambling service with mobile support. The online gambling service is yet to be launched, despite rolling promises dating all the way back to the second half of 2015, when they expected to launch it within months. In the company’s 10-K filing for 2016, Esports Entertainment planned to again launch their service in the second half of 2016 (more similar promises).
The company has not managed to put out a product as of publishing, and as of their latest 10-Q filing estimate the cost of developing, testing and launching an esports focused online gambling website at $2 million with a six-month timeline for developing and launching the site after raising the necessary funds.
In addition, the firm has plans of purchasing Grand Princess Casino in Antigua, a 62,000 square foot facility in the Caribbean, with intention to convert it into “Esports Coliseum”. The idea is to build a venue to host esports events, with a casino giving guests a chance to gamble on the games on the premises. The company estimated costs of acquiring and refurbishing the location at $14 million, with annual operating costs in the range of $6-8 million. As with the online website, the firm expects to launch the facility within six months of raising the required funding – a tight deadline for an acquisition, renovation and equipping a location.
As of March 31, 2017 the company had four employees with four hires made since, comprising social media manager, global affiliate manager, head of esports and vice president of corporate finance. In addition, Esports Entertainment has two directors – David Watt and Yan Rozum – on the payroll at $25K and $20K a year, with a previous director Shawn Erickson having left without an announcement between the March 31, 2016 and 2017 10-Q filings.
Oddly enough, the company’s filings dedicate more than 300 words to describing the citizenship by investment program of Antigua and Barbuda. It goes without saying Esports Entertainment are applying for the potential Grand Princess Casino acquisition to be considered for the CIP program. The filings go to great detail to explain the ability of family members to apply for citizenship, as well as the various benefits of visa-free travel to over 100 countries – a curious selling-point for a company presumably looking for investments on the basis of its own operations, as opposed to ability for investors to acquire a new passport.
OWNERSHIP, FINANCING, AND A DEFAULT
As of September 30, 2016, reported in Esports Entertainment’s 10-K for 2016, founder and CEO Grant Johnson owned 50 million shares, good for a 71.6% stake in the firm.
Second largest shareholder was Shawn Erickson with 10 million shares, which were issued to him on February 20, 2013 as he joined the company as a director. However, Erickson left the firm three months later on May 20, 2013, but continues to hold a 14.3% stake. A minor 0.1% stake belongs to Yan Rozum, who is a director in the company and CEO of Swiss Interactive Software GmbH, who have granted Esports Entertainment “an exclusive license to certain esports event wagering platforms for real money play and wagering.”
Another 100 thousand shares, good for an identical 0.1% stake, belongs to Chul Woong Lim, who is listed as the Secretary General of International e-Sports Federation (IeSF).
As of March 31, 2017 – which does not include all of the latest financing rounds – the company had $350K of cash and $115K of liabilities on their balance sheet. Last year Esports Entertainment had raised $65K in convertible notes due March 3, 2017 issued at a 7% discount and 8% interest rate, which they defaulted on despite seeming to have enough cash on hand to make the payments. As a result, the company agreed to pay an increased price of $90K in common stock. As an incentive, the company had also issued 430K warrants with a strike price of $0.14 (with share price in the $0.40's) upon issuance of the convertible. Similarly, in 2014 the company had issued a $50K note that was later converted to 700K shares.
On February 6, 2017 Esports Entertainment announced financing commitments of $850K, with Denver-based venture capital firm First Capital Ventures contributing $600K. On May 18, 2017, the company announced having closed an over-subscribed financing at $1.2 million, with high net worth individuals contributing the balance on top of First Capital’s $600K. Notably, terms of the financing were not disclosed in the press releases with no filings since. In the press release, CEO Grant Johnson stated the financing will be used to launch the gambling platform – which previously was estimated to cost $2 million – and “execute the firm’s business development strategy for the rest of 2017, including exhibiting at the world’s largest esports conferences”.
To my knowledge, there are no large esports conferences scheduled.
It is worth noting the directors have thus far been solely paid in shares and the company has a long history of dilutive share issuances beyond the previously mentioned debt conversions. In fiscal year 2015, Esports Entertainment issued 3.6 million shares for cash, 0.8 million shares for services on top of 0.9 million shares for debt conversion, on top of the pre-existing 63.3 million shares. In fiscal year 2016, the company issued 0.8 million shares for cash and 0.7 million shares for services. Through three quarters of fiscal year 2017, the company had issued over 5 million shares, bringing the total to 75.3 million shares outstanding as of March 31, 2017.
Per the information disclosed in the company’s SEC filings, Esports Entertainment is effectively a pre-revenue holding company with an idea of a future business with some pieces set, but nothing developed as of today. Curiously its share price has risen nearly 600% YTD, from the $0.20s in January and $0.70s in June, to roughly $2.50 per share – good for a market capitalization of almost $190 million despite no revenue, intellectual property or even near-term possibilities to generate revenue.
First Capital Ventures President and CEO Gary Graham stated in a press release that Esports Entertainment “represents the only pure public vehicle to investing in esports in North America, [..] an optimal esports entry point and a clear path to investor liquidity.” In reality, liquidity in the company has been limited at best and is unlikely to change soon.
While the Esports Entertainment’s market capitalization has skyrocketed from $50 million on June 20, 2017 to $190 million on August 20, 2017, the total traded volume in the period was just $100K.
In other words, the company’s stock is so illiquid that trading $100K pushed up the company’s valuation by $140 million.
To put this into perspective, more value was created by trading just over $100K worth of shares than the acquisition prices of DreamHack ($28 million at 3.5x revenue for a profitable company) and ESL (74% stake for $86 million, financials undisclosed) combined, with over $70 million to spare.
Some relevant B2C public comparable for Esports Entertainment include Betsson and Mr Green and Co, both of which are successful gambling companies listed in Sweden. The companies currently trade at an average P/E multiple of 15x this year’s earnings, which means to justify today’s public market valuation of $190 million, Esports Entertainment would need to generate over $10 million of net income.
The company is unlikely to even be able to launch its business during the calendar year as they have not raised as much as they estimated launching the gambling website would cost ($1.2 million vs. $2 million). In other words – in case it was not obvious already – it is incredibly hard to justify the firm’s current valuation, even going forward. The gambling market is lucrative with low barriers of entry, which is why it is so cut throat competitive and hard to get market share in.
Esports Entertainment lofty and seemingly unrealistic valuation appears to be a product of the very inefficient OTC market it is listed on, but it is unclear why the venture capital firm First Capital Ventures has poured in over $600K after proper due diligence. It is possible there is something to Esports Entertainment that does not meet the eye when simply going through the company’s filings and press releases, but it is hard to see what that could be.
To make matters worse, the company has previously defaulted on a convertible and has a tendency to issue shares liberally – making it a sketchy investment without exponential growth on what still remains a non-existing revenue base.
Given a history of failed promises for launch dates and a cash balance smaller than the estimated cost of launching the gambling site, it is unlikely Esports Entertainment can get their core business off the ground in the next six months, or without additional financing. In addition, the business plan of opening the Esports Coliseum – with estimated total costs of $14 million to get it up and running and annual operating costs of $6 million – all-year round in the Caribbean as a potential site for tournaments, with a casino attached, seems unlikely to be successful.
Today’s fans are online, and while capturing a share of the large, lucrative online gambling market could make Esports Entertainment a success, it is tough to imagine a scenario where the Esports Coliseum could be run profitably; if not only used as a carrot for investors interested in the possibility of obtaining citizenship. And again, they are trying to break into a very tough market.
Finally, any investor interested in Esports Entertainment should take a hard look at the fundamentals and business plan of the company. The market valuation means little when it has been created by $100K of traded value, and simply adding esports to one’s company name does not make it a high growth stock with unlimited future potential – something that at times seems forgotten in the current esports valuations. The company has a long way to go, and it remains unclear whether they are going to get there.
Currently their only asset appears to be the public listing itself.