Enthusiast Gaming Holdings (EGLX.T) is a company focused on building a large media platform for video game and esports fans worldwide. They have a diverse mix of digital media, entertainment assets, and a broad audience predominantly composed of Gen Z and Millennials, and the company engages around 300 million gaming enthusiasts globally every month​​.

So why is their balance sheet such a terminal pile of crap?

Look, back a few years, when folks began to discover their kids and grandkids were spending all night watching other kids play video games on Twitch and Youtube, there was a big market interest in anything e-sports. That lasted only one quarter, when everyone subsequently learned that the money in e-sports was being made by content producers and not teams, content platforms and not events, and video game developers and not players.

In short, investing millions in a foursome of teenagers who might make $20k in prize money per year if they’re the best in the world, while Twitch takes half their content income, just wasn’t as big an investment opportunity as folks initially thought.

But one company emerged from that buzzy, frothy quarter with tens of millions raised before people caught on, with a bunch of media properties acquired, an e-sports team under it’s wing, and a C-suite that believed their own press enough to ignore the quarterly losses of millions on their balance sheet and just keep going in hope it might one day balance out.

Well, here we are, several years later, and it’s not working out. It’s not even close to working out.

Enthusiast Gaming lost $59.06 million in Q3 and ended the quarter with $2.8 million in cash.

They also resurrected their Rocket League team, and if you think that move is going to earn them enough to break even, or even slow the bleeding, you’re high.

Bro, I PLAY ROCKET LEAGUE. The best in the world at that game barely earn anything from prize money, and very little from sponsors. In fact, the best in the game frequently retire by the time they get to college age, because there’s more money in making Youtube content than, you know, actually competing.

Enthusiast busting out their Luminosity team as some sign everything is good is exactly the sort of poor decision making Enthusiast has been known for all along.

They took a $40 million goodwill write-down this quarter, so let’s be charitable and say they ‘only’ lost $20 million doing business. And they have $4.5 million in room left to borrow money if needed, and $2.8 million in cash.

By my math, they have a month left to either sell a bunch of assets, fire everybody who doesn’t earn more than they cost, and/or convince someone with deep pockets to plug the holes in their business with wads of hundos.

Best of luck.

Enthusiast Gaming is, by my reckoning, just short of broke.

Here are ten points that an investor should consider before buying the stock:

Revenue Decrease: Total revenue for the three months ended September 30, 2023, was $45,558,271, a decrease from $50,578,758 in the same period in 2022​​.

Cost of Sales and Gross Margin: The cost of sales was $28,821,750 in Q3 2023, down from $34,018,169 in Q3 2022. Despite the decrease in revenue, the gross margin remained relatively stable at $16,736,521 in Q3 2023, compared to $16,560,589 in Q3 2022​​. Operating expenses were a whopping $25 million, and goodwill writedowns were twice that.

Net Loss: The company reported a significant net loss of $57,249,044 for the period ending September 30, 2023, more than the loss of $30,189,879 in the same period in 2022​​.

Growth Strategy: Enthusiast Gaming employs a combination of organic growth and mergers and acquisitions (M&A) to expand its viewership base. They focus on optimizing cost per thousand impressions (CPMs), increasing direct sales, growing subscribers, and deploying digital products​​. Sadly, CPMs are dropping – a situation they say is affecting the broader market. This may be, but saying ‘it’s happening to everyone’ doesn’t put dollars in their pocket.

Subscriber Growth: The company has grown its subscriber base from approximately 61,000 in March 2019 to approximately 265,000 in September 2023. This growth in subscribers can be a positive indicator of increasing user engagement and potential revenue streams,​​ but it isn’t as of this quarter. If anything, monetization of those subscribers is falling and has been for some time.  To make the company profitable, it would have to break records in growth and revenue by multiples.

Decrease in Media and Content Revenue: Media and content revenue, mainly from advertising and content licensing, decreased in Q3 2023 compared to Q3 2022, especially on their video platform where revenue per thousand impressions (RPM) dropped by a stark 22%​​.

Direct Sales in Media and Content: There was an increase in media and content revenue, excluding the video platform, mainly due to an increase in direct sales, which totaled $16.6 million in Q3 2023 compared to $15.7 million in Q3 2022​​. Either way, smaller numbers than needed.

Digital Media Landscape: The digital media industry, especially digital advertising, is experiencing growth, with corporate spending expected to increase significantly in the coming years. This broader market trend could benefit Enthusiast Gaming, given their focus on digital media and advertising​​, but this hasn’t been the trend recently. Yes, big sponsors are hitting the demo that takes in Enthusias content, it’s just not making it to the Enthusiast bottom line.

Gaming Media Consumption Trends: There is a significant shift in how gamers consume content, with a large percentage of Gen Z and Millennials engaging with gaming video content. If anything, this area is massive and getting moreso by the month. These deos don’t watch TV, they watch social media and streaming content. It SHOULD be a golden era for Enthusiast. The problem is, the money pushes to the top, not the middle, and the middle is where EGLX sits.

Key Partnerships and Announcements: Throughout 2023, the company made several significant announcements, including partnerships with major brands like Mondelēz International and Campbell Company of Canada, and hosting successful events like the PGC London, which indicate active business development and potential for growth​​. Cool, that’s fair, but none of that has seen bottom line growth.

By all metrics by which one would judge this company, CPM growth, subscriber growth, sponsor deals, they *should* be doing fine. But they’re not, because the assets are all outdated bloat.

Sometimes management falls so in love with their assets on the way up, they can’t fathom letting them go on the way down, but Enthusiast’s assets are falling hard in value and goodwill because they’re old news. Case in point, AddictingGames.com, which was a go-to timewaster site before the iPhone era. As a younger tike, I went there a LOAD when it was 2am and I couldn’t sleep, but I haven’t darkened it’s door in ten years. That it’s still a thing, and that Enthusiast is leaning on it, is baffling to me. This is the equivalent of buying Farmville and thinking it’s going to get you to profitability ten years after we stopped playing it.

Boys, that train has long gone.

The time to offload some of these assets and bring cash in that could be used to make new moves was a year ago. Instead, this company is falling off the NASDAQ, resisting the urge to roll itself back, is super low on walking around money, and has one quarter of runway left – tops, so any deals it does now are going to be done in the harsh light of burning dollar bills. When potential buyers know you’re screwed, they can lowball you now and wait you out if you say no.

Restarting their rocket league team is just fucking baffling. This company is spending 600k per quarter on e-sports teams that can NEVER pay that back, seemingly in an effort to sprove to everyone that they’re not in trouble.

But boy howdy are they in trouble.

Shut it down. Strategic review. Care and maintenance. If you really have $126 million in goodwill and $102 million in assets (which is what they’re claiming), you should be able to offload that for $100 million-plus, which for a $60 million market cap company would be a really good pivot point.

Sell what you can for what you can and ACCEPT THE FACT THAT YOU BUILT A LARGE COMPANY THAT DOESN’T WORK.

You won’t.

— Chris Parry

FULL DISCLOSURE: No dog in this fight, but I often rememeber the arrogance by which they came to the public markets, with one executive telling me around their IPO, “Fuck Canada, they don’t get what we’re building here.” Oh, we got it alright. We’re just not slackjawed enough to buy into it.