Esports Entertainment Group Inc. (NASDAQ:GMBL) Report

By: Akmal Soliev


Disclaimer: The following report is an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. AZS Consulting shall not be held accountable for any financial losses that are made based on the following document. AZS Consulting has no affiliation, association, authorized, endorsed by, or in any way officially connected with the Esports Entertainment Group Inc., or any of its subsidiaries or its affiliates. The request to have a discussion about AZS Consulting's findings of GMBL has been denied by the CEO of Esports Entertainment Group Inc., Grant Johnson.


Company Information

Virtual Closet Inc. started on July 22, 2008 as a over-the-counter medicine distributor and marketer. Virtual Closet Inc. later was changed to DK Sinopharma as a pharmaceutical producer and over-the-counter medicine distributor with the latest revenue, 9-month ending 2010, standing at 20.018M USD.


H&H Arizona is “a next-generation Internet gambling company” which was the initiation of Esports Entertainment Group Inc. (from this point on referred to as GMBL). There are no public records of no profit generating H&H Arizona which was registered in Antigua and Barbuda, an offshore tax haven, on February 8, 2011; however, it stated that Grant Johnson is the “Trustee” of H&H Arizona. GMBL was under the current management from May 20, 2013, where H&H Arizona Inc., had conducted stock swap with DK Sinopharma majority shareholder Shawn Erickson. The following arrangement has been made between H&H Arizona and DK Sinopharma for H&H Arizona to have access to the stock market without having to conduct an IPO of the company, the following action is more known as Stock Swap, a common practice as a form of cost-saving activity.

Considering that after the following stock swap Grant Johnson held the majority stock, it is safe to assume that he was the main investor/shareholder in H&H Arizona.


On April 30, 2013, the Company issued 10,000,000 shares at a fair value of $100,000 as a commencement bonus for consulting services to the Company’s President.

At which point the Company's president was Shawn Erickson, NOT Grant Johnson.

In further reports, previously majority holder H&H Arizona would be mentioned in just brief historical descriptions, not as GMBL shareholder. From this points forward the majority holder of GMBL would be CEO of Esports Entertainment Group Inc., Grant Johnson who held 79% of the stake and solidified its complete control over the company by placing himself (Grant Johnson) as President, Secretary and Treasurer on May 20, 2013. This action gives us further believe that Grant Johnson was the owner/majority shareholder of H&H Arizona.

AZS Consulting will not pursue the company's history prior to Stock Swap and from this point, the report will focus on VGambling Inc. and Esports Entertainment Group Inc. or to be precise ticker GMBL.

The ticker GMBL was reassigned by VGambling Inc. in 2014 with a previous ticker DKSP, DK Sinopharma.

It should be noted that since the stock swap GMBL has been non-revenue generating for-profit corporation.


CEO of Esports Entertainment Group Inc.; Grant Johnson and Swiss Medica Inc.

Grant Johnson had previous experience as a President with Swiss Medica Inc. a pharmaceutical marketing and distribution company that was restructured to the existence in May 2003.

Grant Johnson joined the company on April 2003, prior to the establishment of Swiss Medica Inc., where he was granted 500,000 company shares as a signup bonus.

The following company has proven to be of extreme interest to AZS Consulting due to the two reasons:

  1. The company was not able to operate from the year 2003 onwards without diluting the company, the organization had issued a sale of common stock, closing of gross 2.5 million USD, with a warrant structure whereas Swiss Medica Inc. would pay in cash 2% of the initial value of the stock. We will go back to the following point later on.

  2. The company has been reporting differential numbers, however, in the first years of operations, the company has been revenue-generating, despite that the company not reporting a single net profit positive year during its operations since 2003. It should be noted that while the management’s salary resulted around 300K USD they have been constantly reporting of high SG&A numbers, an example of which 2005’s 10M USD on SG&A with a mix share repayment.

In 2006 annual report Swiss Medica reported sales of 1 M USD, down from 5.3M USD in 2005 (whereas 2005 annual report had 6.4 M USD) which has been amended in all previously published annual reports.

Swiss Meidca Inc. has revoked its securities in 2012 with Grant Johnson exiting the company on May 31, 2007. It is not recorded if Grant Johnson has liquidated his shares, 880K, hence it is possible that he lost by the end of 2006 61,600 USD in comparison to a possible liquidation gain of 404,800 USD in 2005.

Key Historical Factors

On 1st of April 2015, GMBL has issued its first annual report. For AZS Consulting seeing GMBL as a startup expected that the company would be a non-profit generating entity in the first year and/or two of its operations. There are certain remarks which bare some questionable entries to the annual report, such as:

During the year ended June 30, 2014, the Company incurred rent of $6,726 (2013 - $5,972) to the President of the Company. The company rent office from the President of the Company month to month.

Where the President of the company, Grant Johnson, has forgiven rent expense of the office, however, based on the statement the company held only one employee, the president himself, hence it is safe to assume that Grant Johnson was renting an office to GMBL, where he was the sole contracted employee.

On 2014 annual report it has been recorded that VG Gambling, the initial name of Esports Entertainment Inc., has registered for fun betting website along with real money. When it came to researching the following websites it has been discovered that there are no records available online that http://www.vgambling.bet, real money website, has ever existed.

2014:

From 2014 GMBL has been adding the following quote to every annual report as a form of risk mitigation:

At the present time, we have not made any arrangements to raise additional cash. We will need additional cash and if we are unable to raise it, we will either suspend development and/or marketing operations until we do raise the cash necessary to continue our business plan, or we cease operations entirely.

The following quote has been proven interesting due to the company always having the ability to raise the funds to operate that year.

Management believes that if subsequent private placements are successful, we will generate sales revenue within the following twelve months thereof.

The revenue has not been generated since the first year of the GMBL's activity, due to the company constantly being in the development stage. The development stage is still on-going despite a running website.

On September 30, 2014, the Company increased authorized share capital from 75,000,000 to 500,000,000 shares of stock having a par value of $0.001 per share.

This would be important information since from 2014 the company has been raising funds for operations and development, and a form of payments for the services received.

2015:

We would like to showcase the roadmap and business plan that GMBL has declared in 2015. It should be noted as we might see some divergent from the following business plan:

Additionally, in 2015 GMBL has showcased its interest in conducting some form of investment in Antigua and Barbuda. There has been a keen interest particularly in its citizenship program, Citizenship by Investment Program Unit:

VGambling Inc.’s subsidiary H&H Arizona Corporation has recently applied to be designated an Approved Business by Antigua and Barbuda’s Citizenship by Investment Program Unit. If approved under the Program, a minimum $400,000 USD investment in Shares of H&H Arizona Corporation would qualify the investor and his family for citizenship in Antigua and Barbuda. H&H Arizona Corporation has applied to be approved to raise up to $10,000,000 USD of additional capital under Antigua and Barbuda’s Citizenship by Investment Program.

The following program required 10M USD, something should be noted as there would be an attempt to execute it in the following years, however, due to the inability to raise the required funds GMBL was not able to proceed with the project, Grand Princess Casino.

2016:


In June 2016, the Company made an offer to purchase the Grand Princess Casino, located in Jolly Harbor, Antigua, for $8,000,000 (US$). The offer was contingent, among other things, upon the Company being approved for the Citizenship by Investment Program (“CIP”) of Antigua and Barbuda.
If the offer is accepted, the Company plans to use the CIP program to finance the purchase price and the cost of refurbishing and renovating (estimated to be $4,750,000) the facility.

The project the Grand Princess Casino has been declared in 2016 that GMBL would like to also conduct its business on the physical location, in addition to online, none of which was operational at that moment. There is no complete explanation as to how would the CIP program would benefit the company in raising the funds and no information of its benefits to the company, outside of the investor himself/herself.

It should be noted that the Grand Princess Casino is a divergence from the originally declared business plan, however, can showcase itself to be a complimentary business.

During the period ended June 30, 2016, the Company has an accumulated deficit of 936,228 USD. The following statement confused the consultants as their declared capital raised was totalled to 682,891.90 USD. Following the Consolidated Statement of Changes in Stockholders’ Equity showcases that GMBL has recorded the share payments to for the services providers to the Company have been recorded as accumulated deficit too.

Additionally, the confusions of the annual report continue as the declared number of shares for October 4, 2016, is 70,305,514, however, based on the calculation of corporate shareholders the numbers of the shares diluted should be 70,065,177. Due to that there is no accountability on 240,337 shares that were diluted or how they were distributed.

2017:


In June 2016, the Company made an offer to purchase the Grand Princess Casino, located in Jolly Harbor, Antigua, for $8,000,000 (US$). A condition of the purchase is the Company is required to pay a deposit of $800,000. While the Company continues to seek additional sources of equity capital, as of September 30, 2017 the Company has not yet paid the required deposit.

At this point we are seeing that the Grand Princess Casino deal won’t be realized as GMBL does not have required funds to cover up the deposit, nor would it be able to raise the required funds in future.

The company declared that it has raised a sum of 1,087,688 USD by the second quarter of 2017, however, based on the annual report’s statements the company has raised well over, 1,345,030.60 USD. The total cash raised was 2,243,705.65 USD for the year. During the following year, GMBL has issued a large number of common shares and warrants.

Warrants are a derivative that give the right, but not the obligation, to buy or sell a security—most commonly an equity—at a certain price before expiration.

It should be noted that the following warrants would be exercised in upcoming years that would cause GMBL to loose from 0.20 USD per shares. It should be noted that Boustead Securities, LLC were the partners of GMBL for the share sale and would file a lawsuit against GMBL the following year, the lawsuit is still on-going and was postponed from January 2020 date. Contract litigations have been present in Swiss Medica Inc.'s annual reports also.

2018:

From 2018 the company claimed that the website www.vie.gg is able to conduct its business in the United States; European Union member countries; Turkey; Singapore; Colombia.

Despite that, there are no available proven records that the website has been active earlier than the month of April 2020.

In December 2017, we made an offer to purchase the Grand Princess Casino, located in Jolly Harbor, Antigua, for $7,500,000. As of September 30, 2018 and October 12, 2018, we had not paid the deposit required as a condition of the offer and there is no assurance we will do so or consummate the purchase.

This would be the final note about the Grand Princess Casino as GMBL was not able to fulfil the required deposit and would abandon the following project without any further explanation.

Now if we take a look the company’s original business plan was anticipating the marketing expense of the website to be 2M USD, however, since the influx of additional cash the company has raised the following minimal requirement to 5M USD, hence raising its requirement for revenue-generating.

2019:

As of June 30, 2019 GMBL has accumulated deficit of 10,184,187 USD (6,381,365 USD just for the first two quarters of 2019) as of the end of the year the company has spent collectively 16,092,617 USD and has a working capital deficiency of 9,504,792 (the payments that still have not been executed).

In 2019 annual revenue the company have claimed to generate hundred thousand dollars (unaudited), however, the end of the year current report has claimed that the company has not generated any revenue since the GMBL’s initiation. Based on the current quarterly report GMBL is expecting to lose further cash in the upcoming months.

Based on the annual report the company has issued 87,988,118 shares, which would be a bit absurd as the company is allowed to issue only 500M shares. AZS Consulting really hopes that the following statement was a mistake and calculated that the Company has issued 225,158,216 shares up to date.


Based on company dilution calculation, GMBL's valuation sits at 0.175 USD per share (market cap of 39.468M USD).


Corporate Shareholders

When we take a look at the corporate distribution, we can see the annual reports have been generated with numerous interesting patterns. By the end of each year, starting from 2017, the directors (non-Grant Johnson) had the ability to purchase shares of the company at a discounted price, however, based on the following years it is clear that they have not executed the following options.

In the last annual report VG-SPV LLC has 5.3M shares, what was not noted in the annual report, however, was disclosed in previous reports, is that VG stands for VGambling whose main shareholder is Grant Johnson.

Below one can find recent sale by Shawn Erickson of his shares in GMBL summing his profit to around 599 thousand USD.

Important note: the following stock has been moving around 5-9 USD per share mark on the stock market, but on the private market the price of GMBL was sold at 0.15 USD per share in 2019, non-warrant exercisable!

ADTV / Outstanding Shares

ADTV (Average Daily Trading Volume) is extracted from summing the last pre-assigned date range and dividing by the assigned date rate. For GMBL we took ADTV of the last 20 days, as the company is a small enterprise and recent issuance of convertible notes increased the stock price. The ADTV of GMBL is 569,190.

Outstanding Stock is the stock that is available on the stock market and is currently traded, which in the current moment is 9.67M.

When we divide ADTV by Outstanding Stock we get the percentage of 5.88%, the following ratio is below the industry benchmark of 30% that makes the stock illiquid. If the stock is illiquid that means the stock would take a bit longer period of time to trade and might be sold under the market discount to liquidate it (to cash it).

Conclusion

Based on presented facts it is visible that GMBL is not acting according to the standard gambling company. For the past 6 years, they have been developing their gambling platform with divergence with the possible acquisition of a casino with/for citizenship program and were unable to raise funds.

From our view, the annual reports contain multiple miscalculations and have been multiple times a copy-paste of the previous years without any modifications to certain important informative sections to the investors.

The company has two prices the publicly traded price and private traded price, which is much lower than publicly traded. It is possible that majority trades on the public are done via high-frequency traders and/or small-cap investors, as GMBL claims to be a penny stock while trading over 5 USD minimum mark.

It is possible that the company would generate revenue in upcoming months/years, but it is clear that they would need to become an absolute leading gambling company in order to prove the investor’s expectations, as the private market’s share price dropped from a range of 0.25-1.25 USD in 2017 (cooperation with Boustead Securities, the company with whom GMBL has litigation) to 0.15 USD in 2019.

SOURCES:

Esports Entertainemnt Group Inc. SEC. https://sec.report/CIK/0001451448

Esports Entertainemnt Group Inc. SEC Insider Trades. https://sec.report/CIK/0001451448/Insider-Trades

Swiss Medica Inc. SEC. https://sec.report/CIK/0000318245

Esports Entertainemnt Group Inc. (GMBL) Stock. https://finance.yahoo.com/quote/GMBL?p=GMBL

Esports Entertainment Group | Esports Wagering Platform. https://esportsentertainmentgroup.com/

Agoracom: Small Cap Investment - Esports Entertainment Group - Official Investor Hub. https://agoracom.com/ir/EsportsEntertainmentGroup

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