Esports Technologies Aims For Mini IPO

Summary

• Esports Technologies has filed to raise $9.5 million in an IPO.
• The firm operates an online esports betting site.
• EBET has produced contracting revenue from a tiny base and the IPO is valued excessively, so I'll pass on it.
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Photo by nemke/E+ via Getty Images

Quick Take

Esports Technologies (NASDAQ:EBET) has filed to raise $9.5 million in an IPO of its common stock, according to an S-1 registration statement.

The firm operates a licensed online gambling platform.

EBET has produced sharply contracting revenue from a tiny base and the IPO appears excessively valued, so I'll watch it from the sidelines.

Company and Technology

Las Vegas, Nevada,-based Esports was founded to develop an online esports/sportsbook gambling service focused on the regions of the Asia Pacific and Latin America.

Management is headed by president, Chairman and CEO Aaron Speach, who has been with the firm since 2020 and was previously a founding member at ESEG Limited, which was acquired by the firm.

The company’s primary offerings include real money betting on:

• Esports titles

• Professional sporting events

• iGaming casino games

The operates via gaming license from the Curacao Gaming Authority with almost all of its wager history sourced from the Philippines.

Management seeks to expand its target sources to Japan, Thailand, Mexico and South America and to introduce a "free to play" online esports offering in the United States in 2021.

Esports has received at least $8.2 million from investors including Black Chip Holdings, EBJT Management, Crossover LLC and Crimson Consulting & Trade.

Customer/User Acquisition

The firm operates its platform at gogawi.com, where 70% of its customers bet on esports competitions and 30% bet on traditional sporting events.

Management has plans to create a "business-to-business" experience that seeks to match larger volume betting interest "across businesses operating in the esports wagering space," since it believes the industry has produced solutions that have been more focused on the 'recreational bettor.

Sales and Marketing expenses as a percentage of total revenue have increased as revenues have decreased sharply, as the figures below indicate:

Sales and Marketing	Expenses vs. Revenue
Period	Percentage
Three Mos. Ended Dec. 31, 2020	363.7%
FYE September 30, 2020	98.2%
FYE September 30, 2019	34.3%

Click to enlarge

Source: Company registration statement

The sales and marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing spend, swung to negative (0.7x) in the most recent reporting period, as shown in the table below:

Sales and Marketing	Efficiency Rate
Period	Multiple
Three Mos. Ended Dec. 31, 2020	-0.7
FYE September 30, 2020	0.3

Click to enlarge

Source: Company registration statement

Market and Competition

According to a 2020 market research report by QYResearch, the global market for esports and esports gambling was an estimated $142 billion in 2020 and is expected to exceed $203 billion by 2026.

This represents a forecast CAGR of 6.2% from 2021 to 2026.

The main drivers for this expected growth are an increase in demand from mobile users to bet on esports activities as well as a wider range of esports events and opportunities to wager on.

Also, in 2019, Europe accounted for the largest market share in the industry at 47.7%. China (Macau) represented the second largest market at 21.2% market share.

Major competitive or other industry participants include:

• DraftKings

• Bet365

• Pinnacle

• Flutter Entertainment (FanDuel)

• William Hill

• Roar Digital

• Luckbox

Financial Performance

Esports’ recent financial results can be summarized as follows:

• Sharply contracting topline revenue, from a tiny base

• Gross loss and negative gross margin

• Increasing operating losses

• Growing cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue
Period	Total Revenue	% Variance vs. Prior
Three Mos. Ended Dec. 31, 2020	$ 10,794	-70.9%
FYE September 30, 2020	$ 195,778	38.9%
FYE September 30, 2019	$ 140,982
Gross Profit (Loss)
Period	Gross Profit (Loss)	% Variance vs. Prior
Three Mos. Ended Dec. 31, 2020	$ (1,465)	-112.2%
FYE September 30, 2020	$ 81,214	12.0%
FYE September 30, 2019	$ 72,529
Gross Margin
Period	Gross Margin
Three Mos. Ended Dec. 31, 2020	-13.57%
FYE September 30, 2020	41.48%
FYE September 30, 2019	51.45%
Operating Profit (Loss)
Period	Operating Profit (Loss)	Operating Margin
Three Mos. Ended Dec. 31, 2020	$ (2,140,364)	-19829.2%
FYE September 30, 2020	$ (573,255)	-292.8%
FYE September 30, 2019	$ 24,103	17.1%
Net Income (Loss)
Period	Net Income (Loss)
Three Mos. Ended Dec. 31, 2020	$ (2,750,731)
FYE September 30, 2020	$ (573,255)
FYE September 30, 2019	$ 24,103
Cash Flow From Operations
Period	Cash Flow From Operations
Three Mos. Ended Dec. 31, 2020	$ (812,883)
FYE September 30, 2020	$ (67,717)
FYE September 30, 2019	$ 11,792
(Glossary Of Terms)

Click to enlarge

Source: Company registration statement

As of Dec. 31, 2020, Esports had $2.6 million in cash and $1.2 million in total liabilities.

Free cash flow during the 12 months ended Dec. 31, 2020, was negative ($971,404).

IPO Details

Esports intends to raise $9.5 million in gross proceeds from an IPO of its common stock, offering 2 million shares at a proposed midpoint price of $4.75 per share.

Additionally, selling shareholders may offer 1.46 million shares.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $83.6 million, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 10%.

Management says it will use the net proceeds from the IPO as follows:

We intend to use the net proceeds as follows: [i] $2.5 million for product and technology development; [ii] $4.5 million for marketing; and [iii] the remainder for working capital.

We believe the net proceeds of this offering, together with our cash and cash equivalents, will be sufficient to meet our cash, operational and liquidity requirements for at least twelve months.

Management’s presentation of the company roadshow is not available.

The sole listed bookrunner of the IPO is Boustead Securities.

Commentary

Esports is seeking public capital market funding to continue to develop its offerings and expand its sales and marketing activities.

The firm’s financials show little in the way of revenue and significant losses as a result.

Sales and marketing expenses as a percentage of total revenue grew markedly as revenue decreased sharply. Its sales and marketing efficiency rate swung into negative territory.

The market opportunity for esports gambling is expected to grow substantially in the year ahead, with Europe and Asia accounting for the majority of activity.

Boustead Securities is the sole underwriter and the one IPO led by the firm over the last 12-month period has generated a return of 108.6% since their IPO.

The primary risk to the company’s outlook is maintaining its Curacao gaming license, without which it would cease to be able to provide gambling services.

As for valuation, management is asking IPO investors to pay an excessive revenue multiple at IPO, so it appears to be far overvalued; I'll watch the IPO from the sidelines.

Expected IPO Pricing Date: To be announced.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.