Key points:
- Esports has issued new stock which has crashed the price
- They've done this before, the last time was in February
- Killing the stock price to raise funds happens, but it's not a desirable habit to get into
Esports Entertainment Group (NASDAQ: GMBL) stock has achieved that nasty feat of falling below the stock offering price as it issues new stock. This really is not what anyone wants to see at all. The offer is underwritten, so the company will get the money, but it's not a good sign for the future of that GMBL stock price. It's possible to think that this is something of a miscalculation by Esports. It's also possible to think more cynically, and point out that it's a great deal for the company.
Esports Entertainment is a Malta based company that then runs varied iGaming operations in the US and internationally. Vie.bet is a esports platform, Sportnation.bet an online sportsbook and casino and so on. The problem seems to be that it's a small player in a rapidly growing market, one where the big boys are arriving in force. Theur accounts show that for the 3 months ending March 31 2022 their revenues of $15.6 million only just covered their general and admin costs of $14.3 million. Costs of revenue (in this field, usually advertising and commission fees to other websites for directing traffic) were another $6 million. There were big asset impairment charges but those aren't cash (which is good, as those were $38 million). GMBL stock is down 95% over the past year as a result of all of this.
Given those numbers cash on hand gives them some runway but not all that much. So, more capital is required perhaps? Which is just what Esports has done, issued stock and warrants to raise $7.5 million. On a total market capitalisation of $17.19 million that's pretty dilutive.
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The prevailing GMBL stock price before this stock issue was priced was some $0.42 cents. That then dropped nine cents yesterday and a further 12 cents today. Taking the current, premarket, Esports stock price to $0.20. Which is, umm, bad, because the new stock is being issued at 25 cents, or $0.25. This is also where we get our 53% price decline from, adding yesterday's after announcement and this morning's premarket price changes.
Well, not entirely, the new issue is a combined warrant and stock for 25 cents, the warrants exercisable at 25 cents themselves. So there's some option value to the warrant even at this price.
And yet, this doesn't strike as a very useful fund raise, not from the point of view of stockholders at least. Sure, the company got its money – it's underwritten – and got it at a price higher than the market thinks it's worth after the fund raise. So, selling something for more than it's worth, that's a win.
But it's also worth thinking a little more. For as we remarked back in February, they've done this before. GMBL stock fell 40% when they announced the price of the stock raising they had then. If every time they need more money they're going to cut their own stock price off at the knees then perhaps Esports isn't quite where we desire to be invested?
