Venture-stage equities often find success by building businesses that are key components of sectors that have the market’s attention. The recently-listed FansUnite (CSE: FANS) is such a company, making an earnest attempt at developing useful tools and spaces that serve the online gaming market. It’s a market that has seen sustained investor attention thanks to an ongoing liberalization of United States gaming laws.

We’ve seen strength in Penn National Gaming (NASDAQ: PENN), following their 2019 acquisition of Barstool Sports, despite sportsbooks being shut down for lack of sports, partially as a result of its very loud founder pivoting to stocks. Canadian gaming darling Stars Group (NASDAQ: TSG) (TSX: TSGI) was taken over by UK based Flutter Entertainment (LSE: FLTR) in an all-stock deal worth approximately $11B. And just as the stock market is an easy sell for gambling people, so too is the enormous potential of gambling businesses easy for investors to understand.

But there is a limit to the average investors’ attention span, and it is a shallow one. FANS’ investor deck is cognizant of that fact, and plays to it by laying the components of the company out in simple terms with primary colours. It tells us that this is a company that runs a gambling website, sells software for making and running gambling websites, and makes video games that people can gamble on, then licenses those video games to other gambling websites that take players’ action.

If that sounds like a whole lot to take on, it’s because it is. The MD&A betrays the fact that the company’s resources might be spread to thin, telling readers that FANS is “Focused on both B2C and B2B sales fronts,” (emphasis added).

Sales were negligible in the June quarter, but that’s to be expected. The company had spent two years building a white labeled sportsbook software that accepts all currencies and crypto, uses blockchain to run a sportsbook, “leverages the full suite of Betrader odds,” handles risk management… and hadn’t been released yet.

The veritable Swiss army knife of betting business enterprise software isn’t named in those docs, but we gather that it’s Betmaker Labs, described in the deck in the future tense, and still without a launch date. FansUnite’s own sportsbook product “McBookie.com” is described in the deck as having 10,000 active members and having churned through $135 million in betting volume “last 3 years,” which is a curious timeframe. The MD&A has McBookie “earning over 1.1 million in revenue” in the year ending 2018, and doesn’t say why there aren’t numbers available for 2019.

The company likes to talk up the potential in the newly acquired Askott Games, to the point that it would have us believe that it invented gambling on video games. The division serves its own titles to external casino aggregators, but contains no titles we’ve ever heard of (“Loothunter” anyone? “Crash Heist?” Why can’t it set me up to bet on Madden like a regular degenerate?). The operation booked $21,000 last quarter, and about as much the quarter before, to create bottom line losses of $1.2 million over the past six months.

Tale of the Treasury

The shot right now is going to be whether or not the company can get the market interested in part or all of this e-gaming/gaming/SaaS basket of goods before any part of the paper printed to put it all together gets restless and starts to shake loose an avalanche.

The company’s public listing came to be this past May following a prolonged and confusing amalgamation process that amounted to the reverse takeover of a holding company controlled by perennial CSE volume leader Victoria Square Technologies (VST). Like all public listings, it represents the exit of the private shareholders who founded the company. Before the amalgamation and listing of the companies that would become FansUnite, the companies’ main product, in aggregate, appears to have been stock.

This chart arranges the share issuance of FansUnite, before the Askott Entertainment acquisition, which we’ll get to shortly, by cost and date. The sizes of the bubbles correspond to the number of shares issued in the respective tranches. The pre-listing stock sold well, presumably on the strength of the finders shares and warrants that FANS precursor components were in the habit of giving away. Upon successful raises.

The rounds that generated the most cash were two subscription receipt issues, private placements and warrants. Much of the cheaper paper was issued to founding shareholders who have languished with a pre-listed shell for more than two years, but the bulk of the cheap paper was issued fairly recently.

Grouping the stock by cost is the best way to get a sense of the weight of the overhang at the current price, and we haven’t even got around to the Askott stock.

SAFEr than the average bear

Before accounting for the subscription receipt round that would raise the amalgamated company its latest $5 million, FansUnite reported having issued 71 million shares of its stock to buy 37 million shares of Askott Entertainment, the creators of “exclusive casino style RNG games with esports and video game themes,” at a cost to the FANS treasury of $0.39/share, which seems fair. The subscription receipt round was at $0.40, and the last stock Ascott sold to raise money went for $0.44, and the time before that $0.40.

But most of Askott’s stock didn’t cost anywhere near that much. The bulk of Askott’s outstanding shares – roughly 30 million, appear to have been issued in two 2017 Simple Agreements for Future Equity (SAFE). SAFEs are an agreement with founding investors that stock is issued for their seed rounds at such a time that equity rounds are done in the future at an arranged discount.

The details are hazy, because Askott was never a fully reporting issuer, but based on reports of exempt distribution and the June 30th, 2020 financial statements filed with the acquisition, 58 million of the 71 million FansUnite shares issued for Askott appear to have been created for a raw investment of $859,000 in 2017, which would mean that they cost their owners somewhere in the neighborhood of $0.03.

The success of this promotion will have a great deal to do with the patience of these Askott shareholders. The company has wisely locked most of the shares issued for Askott up, but the release dates come at a quick tempo. The first 7 million shares are already in the float, another 10.6 million will be released September 5th, and the bulk of it comes loose in 17.7 million share tranches November 5, 2020, February 5, 2021, and May 5, 2021.

Should it become the next e-gaming / sportsbook / sportsbook SaaS sensation, the company might create enough interest to soak up all that cheap paper. FansUnite has averaged a 268,000 share per day volume on the CSE over the past 30 days. It has traded a total of 22 million shares in its four month existence.

Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.